Foreclosure Procedure

While the laws of foreclosure differ from state to state, several types of foreclosure procedure are common. Foreclosure, in general is a legal procedure overseen by the courts. Foreclosure takes place when a loan that uses a piece of non-moveable or "real" property as collateral is not repaid. The individual or organization that provided the money for the loan then takes possession of the property. This is done by one of the several types of foreclosure procedure.

It's all in the Contract

The type of foreclosure procedure that is used depends on the contract made at the time of the loan. Often, a lender can use a "deed in lieu of foreclosure" to obtain possession of the property. The right to such a deed is explained in the loan contract. The contract explains how many payments must be missed before the lender can take possession. If the borrower has a good reason for not paying the loan back on time, he may contact the lender and make new arrangements if both can agree on the terms. A new arrangement for repayment takes the place of the old agreement and neither the borrower nor the lender can go back to the original arrangement without the consent of the other.

Most states require that property in foreclosure be auctioned at a sheriff's sale. This ensures that the property is valuable enough to cover the amount that is still owed, protecting the lending industry from those who might try to borrow more money than a property is worth and default on purpose. If a loan contract gives the lender the automatic right to take possession of the property after a specified amount is not repaid, then the courts do not need to take action and the foreclosure procedure is a non-judicial one. If the contract says that a legal action must precede a foreclosure procedure, then it is a judicial foreclosure. In either case, the foreclosing lender must protect himself from other claims against the property. Several types of creditors can put a claim or lien against the property to pay money owed them even if the property was not used as collateral. Such creditors include utilities for such debts as water bills or electrical bills. The federal government may also place a lien against the property for unpaid income taxes. It's customary for the lender to satisfy such claims before attempting to auction or sell the property. Anyone buying foreclosed properties should always make sure that there are no outstanding liens against them.

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