How Foreclosure Works 

Note:  Timelines and Laws vary from state to state.  The following information is an example.

Foreclosure is the end of ownership and rights over a property in order to sell it for the purpose of paying a debt.  For this to occur, the following items must be happen:

1. The debt must be collateralized by the property to be sold.

2. The debt must be in default. This means payments are not up to date.

3. The creditor must fulfill the legal requirements of the state were the property is located.

Contrary to common homeowner belief, the bank does not own the home. Unlike an auto or boat loan (where the bank's name is on the title), real estate is owned by the borrower. The property is collateral to the loan. "Foreclosure" is not "repossession". Foreclosure does not happen immediately after an owner is late on the mortgage payment. The foreclosing creditor must take specific legal steps. Each state has different laws governing the foreclosure process.

Foreclosure is the ending event of a legal process and process is as follows.

A property is not truly foreclosed until it has been sold at auction according to the state's foreclosure process.  That "the lender is foreclosing" or that a "property is in foreclosure" really means that the lender has initiated the foreclosure process and is proceeding through the legal process to foreclose on a property.

(The following picture is a general timeline and will vary by state.)

Typically, as soon as there is a default in payments, the lender initiates a collection process. This is known as the collections period. This is the best moment for a homeowner in default to reinstate and bring any late payments up to date. The length of a collections period varies with each lender. However, in general terms - if after three months the homeowner has not resolved the late payment situation the lender takes more drastic steps.

The foreclosure process starts if the creditor is unable to collect on late payments. The foreclosure process always starts with a legal notice (notice of default) to the owner stating that if the loan is not paid or reinstated within a specific period of time, the property will be sold at auction in order to pay the debt. This period is known as pre-foreclosure.

The length of the pre-foreclosure stage depends on each state's law. The owner has until the foreclosure date to resolve the default. Solutions for resolving the default range from reinstatement (bringing the loan current by catching up on past due payments), refinancing, paying off the debt in full, or the selling the property to another party in order to satisfy the debt. If none of the above happens by the auction date, the property will be sold to the highest bidder. Foreclosure is this short and specific event. The proceeds from the debt are used to pay the creditors. Anything left belongs to the owner of the foreclosed property.

4.          State Foreclosure Law

The following is for the state of Washington.   For foreclosure laws for other states go to Foreclosure Fraud Alert - http://foreclosurefraudalert.com/laws,_news_&_articles.html

- Judicial Foreclosure Available: Yes

- Non-Judicial Foreclosure Available: Yes

- Primary Security Instruments: Deed of Trust, Mortgage

- Timeline: Typically 120 days

- Right of Redemption: Yes, but may be precluded.

- Deficiency Judgments Allowed: Yes

In Washington, lenders may foreclose on deeds of trusts or mortgages in default using either a judicial or non-judicial foreclosure process.

Judicial Foreclosure

The judicial process of foreclosure, which involves filing a lawsuit to obtain a court order to foreclose, is used when no power of sale is present in the mortgage or deed of trust. Generally, after the court declares a foreclosure, the property will be auctioned off to the highest bidder.

Non-Judicial Foreclosure

The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of the their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee. Regulations for this type of foreclosure process are outlined below in the "Power of Sale Foreclosure Guidelines".

Power of Sale Foreclosure Guidelines

If the deed of trust or mortgage contains a power of sale clause and specifies the time, place and terms of sale, then the specified procedure must be followed. Otherwise, the non-judicial power of sale foreclosure is carried out as follows:

The notice of sale must be transmitted both by regular mail and by certified mail, return receipt requested, to the borrower at their last known address, and by regular mail to the attorney of record for the borrower, if any, not less than thirty (30) days prior to the day of sale.

The sheriff must publish a notice of the sale once a week, consecutively, for four (4) weeks, in any daily or weekly legal newspaper of of general circulation published in the county in which the property is located. Additionally, the sheriff must also post the notice in two public places, one of which must be the courthouse door, in the county where the sale is to take place for a period of not less than four weeks prior to the day of sale.

Said notice must contain the time and place of the foreclosure sale, the names of the parties to the deed, the date of the deed, recording information, a property description, the terms of the sale, and the borrowers rights (or lack of) redemption.
 

1. The borrower has up to eleven (11) days before the sale stop the foreclosure process by paying the past due payments, plus expenses, including trustee and attorney fees.
     
2. The sale must be made by auction between 9:00 am in the morning and 4:00 am in the afternoon at the courthouse door on Friday unless Friday is a legal holiday and then the sale must be held on the next following regular business day. The sale may not be conducted less than 290 days from the date of default and the highest bidder will receive a certificate of sale.
   
   The sheriff may postpone the sale (not exceeding one (1) week next after the day appointed) by giving notice and by posting written notices of the adjournment under the notices of sale originally posted. 

Unless redemption rights have been precluded, the borrower may, within eight (8) months after the date of the sale, redeem the property by paying the amount of the highest bid at the foreclosure, plus interest.

If the non-judicial foreclosure process is used by the lender, then it cannot sue for a deficiency judgment. On judicial foreclosure sales, the borrower can be sued for a deficiency, unless the property is found to be abandoned for six (6) months before the decree of foreclosure.

Attention: State laws can change frequently. Make sure you check for updates with your state or professional legal counsel.