Background

FORECLOSURE is the legal right of a mortgage holder or other third-party lien holder to gain ownership of the property and/or the right to sell the property and use the proceeds to pay off the mortgage if the mortgage or lien is in default.

Initially, the law provided that any default in a mortgage resulted in the automatic ownership of the property by the holder of the mortgage (sometimes referred to as the mortgagee). Over the years, the law was revised so as to allow mortgagors a certain time frame to pay off mortgages before their property was taken away. This process of taking possession of the mortgagor's property because of default is what constitutes foreclosure.

Today, various regulations and state laws govern the process of foreclosure to protect both the mortgagor and the holder of the mortgage from unjust procedures and fraud.

Types of Foreclosure

Foreclosure may be initiated by the mortgage holder anytime after a default in a mortgage. There exist several types of foreclosure in the United States, but only two are generally used, with other types being possibilities in a few states.

The principal type of foreclosure is foreclosure by judicial sale. This is applicable in all states and is the required method in many. It entails a court supervised sale of the mortgaged property after which proceeds goes first to satisfy the mortgage, and then other lien holders, and finally to the mortgagor. Because of it is a legal action by nature, all parties involved must be properly notified of the foreclosure at a prescribed time. A short trial transpires after which pleadings are allowed until some sort of judicial decision is reached.

The second type of foreclosure is foreclosure by power of sale. The procedure involves the sale of the property by the mortgage holder independent of a court action. In areas where it is available, foreclosure by power of sale is generally more convenient and appropriate than foreclosure by judicial sale. Majority of the states allow this method of foreclosure and as with a foreclosure by judicial sale, proceeds first go to the mortgage holder, then to other lien holders, and finally to the mortgagor.

Other types of foreclosure are also available but are considered minor methods since they are applicable only to a few states. Strict foreclosure, which was the original method of foreclosure back then, is one example. Under strict foreclosure, when a mortgagor falls into delinquency, the court mandates the mortgagor to pay the mortgage within a certain period of time. If the mortgagor is unable to comply with the order, the mortgage holder automatically gains ownership and is under no obligation to sell the property.

It is worthwhile to check on foreclosure laws applicable to specific states. Click here to find out more on your state´s foreclosure law provisions.