Real Estate Glossary > F > Foreclosure Definition

Foreclosure is a process that transfers the right of home ownership from the homeowner to the bank or lender. A home goes into foreclosure when the owner defaults The point when a borrower falls two mortgage loan payments behind and is in risk of his home going into foreclosure. on his mortgage loan payments. Once a homeowner receives a notice of default A note from a lender indicating that the borrower has fallen two months behind on his payments. , they'll usually have 2 - 3 months to make payments before the bank officially forecloses on the home. Foreclosure is costly process and can have negative impacts on the homeowner's credit score.

1. Once a borrower falls two payments or 60 days behind on his monthly mortgage payments, the lender will issue a notice of default A note from a lender indicating that the borrower has fallen two months behind on his payments. , the first step of the foreclosure process. At this point, the homeowner may try to sell the home as a short sale A home for sale whose owner owes more on the mortgage than the home is worth. Homeowners hope to sell their home as a short sale to avoid penalties associated with going into foreclosure. if they owe more on the mortgage than the home is worth. This is a long and difficult process that requires the approval of all lien Any legal claim of ownership listed on the title of the home. holders on the mortgage.
2. If the short sale fails, the lender will appoint a trustee to sell the home at a public auction to an all-cash buyer. The trustee is usually an investor representing the collective interests of all the lien holders on the home. If the home doesn't sell at auction, the lien holders are either paid off through private mortgage insurance This insurance protects the mortgage lender against loss if a borrower defaults their loan. Borrowers with a down-payment less than 20% are required to purchase mortgage insurance. payments if the homeowner paid insurance as part of his monthly mortgage payment. If he didn't have mortgage insurance, the secondary lien holders end up taking a loss on their investment.
3. Finally, the lender with the primary mortgage on the home becomes the sole lien. The lender's bank usually hires a real estate agent to list the home in the Multiple Listing Service (MLS) A local or regional service that compiles available real estate for sale by member brokers along with detailed information brokers and agents can access online. . Foreclosures listed in the MLS are easier to buy than short sales because there is only one lien holder, the bank; whereas with short sales, multiple lenders may need to approve of the sale. For more information, Realtytrac provides a great overview of the foreclosure process.