Foreclosure Process

Foreclosure : A Process by which lender forecloses loan contract to default borrower

The process by which the mortgagee sells the property of mortgagor in case he fails to pay the mortgage debt and as a result of which owner terminates his/her property rights is referred to as foreclosure. In simple words, when the lender attempts to recover the balance amount of a loan from the borrower in case of any default, then as last option, the lender sells the asset which was submitted as security against the loan.

Usually the financial institutions like banks attain security, say assets, before granting loan to the borrower. If the borrower successfully makes all the interest payments of loan and that too in stipulated time, then he not only clears up his loan but also discharges his assets that were secured against the loan. But, in case the borrower defaults in making payments of the loan even after the constant reminder of the lender, he does not make any payments, the lender is not left with any option other than to sell his secured asset against the loan amount. Thus, with the procedure of foreclosure, lender forfeits all the redemption rights of the mortgagor regarding the secured assets.

There are three types of Foreclosure:

  • Judicial: This type of situation arises when the sale of mortgage property is supervised by the court and enforced by legal agencies. In this case, the proceeds from the property will be firstly used to clear the mortgage loan, then other lien holders will be paid and after that any balance amount is left its transferred to the mortgage borrower.
  • Non-Judicial: In this type of foreclosure, the lender sells mortgage property of the borrower without any type of supervision by the court. It is also sometimes referred to as Power of Sale of the mortgagee as this process is much faster and cheaper if compared to judicial one.
  • Strict: In strict foreclosure, the court orders the defaulting borrower to pay the balance amount of loan within a stipulated period of time, and if he fails to do so, the lender has the right to sell his mortgage property after that stipulated time.

The foreclosure process is applied when the borrower has stopped making payments for a loan and in turn the lender proceeds with the “deed of trust”. As per the terms of loan agreement, the lender has the right to sell the property of borrower in case when he has stopped making payments. In such a case, the lender sells the borrower’s property and keeps all the sale proceeds so as to clear out his mortgage loan. Furthermore, if the proceeds from the property are not enough to clear out the lender’s loan, then the lender can charge borrower to pay the balance of mortgage loan. If the borrower refuses to pay the amount of loan, then a legal action can also be taken against borrower. This remaining amount generally includes loan principal amount, interest, attorney fees, etc.