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How does Foreclosure Work

Gaynor Borade
A foreclosure relates to a situation in which a lending institution secures a legal right to redeem a 'held' mortgage. The step is taken by the lender to obtain the default interest and loan amount, in the event of the mortgagor being unable to pay the amount due.
Foreclosures are the result of a payment default against a loan taken for a property purchased. Loans are forwarded on the condition that the principal amount and calculated interest is returned to the lender, within a set time frame and in monthly payments. If for some reason, the borrower defaults on the payment, the lender repossesses the property by law.
The act of foreclosing is based on the equitable right of redemption that the lending party is legally assigned. The decision to foreclose a property, for which a loan has been previously sanctioned, is directed towards the repayment of overdue taxes, outstanding contractor bills, and/or Homeowners Association dues.
The immovable property is repossessed with the intent of resale to cover up the debt incurred. A breach in the terms and conditions of the deed of trust and/or the lease agreement, leading to subsequent violation of mortgage rules, leads to foreclosure.


In a foreclosure, the mortgagee forwards an appeal and then a warning to the defaulting mortgagor or borrower. The amount of default repayment and the lapsed time frame are clearly indicated to the borrower.
This is in line with the requirements of the subsequent litigation procedure. In the absence of a favorable response or any kind of communication from the borrower, the lender then registers for and announces a foreclosure on the property. There are different types of foreclosures viz. judicial sale and power of sale.
In case of the former, the court supervises every act within the mortgage, from sale of the mortgaged property to legal actions in case of a default, and finally the foreclosure itself. Whereas in case of the latter, a redemption clause is included within the deed of trust. Hence, the process can be carried out without court intervention.
Another type of legal proceeding that is also a part of the lenders and homeowners tug-of-war is strict foreclosure, which is applicable to certain states.

Common Questions

Q: What is the time period within which a foreclosure is announced, post default?
A: It's depends on the amount owed and the length of tenure during which the mortgage has been broken.
Q: What is a 'transfer clause'?
A: A 'transfer clause' makes it mandatory for the mortgagor to inform the lender about any transfer of the property in question. This covers lease, land contracts, and transfer of title.
Q: How long does a foreclosure take?
A: The length of this process varies from one state to another. Decisions with regards to short sale of the property, refinancing options available, temporary lender arrangements, and filing for bankruptcy take a while.
Q: What is a 'strict foreclosure'?
A: It's decree sets out the amount due under the mortgage, orders it to be paid within time limit, and if payment is not made, the mortgagor's right and equity of redemption are forever barred and foreclosed. If the mortgagor does not pay on time, then title to the property vests in the mortgagee without any sale thereof.
Q: Can a debtor challenge the debt validity?
A: Yes, a debtor can challenge the debt validity. This is possible if the claim is against a bank, to address fiscal damages.