What are Foreclosures? Jeff Adams

What are Foreclosures?

Investment in property requires prudent financial planning beforehand. In numerous cases, the mortgagor becomes incapable of paying off the money borrowed from his lenders after purchasing the property. In such a scenario, the mortgagee can legally force the sale of the said property to recover the balance of the amount lent to the borrower. Foreclosures refer to the selling of properties via such legal processes in such situations.

Foreclosures can be executed only if the borrower pledges the purchased property as a collateral or security for the loan taken. Formally, a mortgagee obtains a court order or follows a specific legal procedure for the termination of the mortgagor’s right of redemption. Eventually the lender or lien holder can take charge of both lawful and equitable title to the said property.

What are the types of Foreclosures?

The mortgagees can execute foreclosures as per the agreed terms in the mortgage documents; usually a certain period after the borrower turns a defaulter. Mainly, two kinds of foreclosures are initiated; however other types are also used in some states.

1. Foreclosure by judicial sale

  • It is commonly referred to as judicial foreclosure and involves court supervision to sell off the mortgaged property.
  • The mortgagee first files a lawsuit against the mortgagor and initiates the process.
  • All the concerned parties are then notified of the commenced foreclosure.
  • Court’s judgment is announced after a typically short hearing in the court.
  • Foreclosures, which are usually filed in state or local court, in extremely rare cases, are filed in Federal courts.
  • The proceeds of such a sale are first intended to satisfy the mortgage, next all other lien bearers and, finally, the borrower, in case any proceeds remain.

2. Foreclosure by power of sale

  • It is typically called a non-judicial foreclosure and is formally authorized in several states if a ‘power of sale’ section is included in the mortgage.
  • Alternatively, it is executed if such a clause was incorporated in the deed of trust that was created instead of a mortgage.
  • This process is executed without judicial supervision.
  • This method is much faster and more economical than foreclosure by judicial sale.
  • The first right to the proceeds stays with the mortgagee and the subsequent claimants are other lien holders.

3. Strict foreclosure

  • In a few states, strict foreclosure is allowed legally, under which the mortgagee files a lawsuit against the mortgagor, who is required to pay the borrowed amount in a time frame specified by law.
  • In case the mortgagor fails to pay the mortgage, the mortgagee gets the right to the title of the property in question, without a compulsion to sell the same.
  • Such a foreclosure is generally executed when the debt amount exceeds the value of the mortgaged property.

There are other types of foreclosures as well, however in limited availability. The course of actions during a foreclosure can be expensive and time-consuming. Mortgagors resort to alternatives such as refinancing, temporary agreement with the mortgagee, short sale or even bankruptcy to avoid the emotional and physical impacts of foreclosures.

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