Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 18, 2012

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Foreclosure occurs when a home is seized by a lender and auctioned off to pay down the remaining balance on a mortgage loan debt, and is the direct result of a borrower halting their payments on a mortgage.

For most, failing to meet a monthly mortgage loan payment is beyond their control. Reduced income, high living costs, property value declines, recurring bills, and heavy debt—such as that found on outstanding credit cards—all contribute to one’s inability to repay a home loan.

For others, ceasing payment on a mortgage is entirely voluntary. These are borrowers who are willing and able to repay their financing, but decide not to due to property value declines and being “upside-down” on their home loan (which means they owe more than their home is worth).

Regardless of the reasoning or motivation behind defaulting on a mortgage loan, all borrowers who fail to meet their monthly home loan payment will eventually receive a letter explaining that foreclosure proceedings will soon begin.

The Timeline of a Foreclosure

The foreclosure process starts with a lender informing a defaulting homeowner that their home will soon be repossessed. The lender will explain to the homeowner that they will be evicted by a certain date unless the homeowner agrees to repay the full outstanding balance of the loan. If the homeowner does not repay his or her entire mortgage loan by the specified date, the lender will kick the homeowner out and the property will be sold at auction.

If the property is sold for less than the outstanding balance of the mortgage loan, the lender will keep all of the money as compensation for their money lost in the financing deal.

If for some reason the home is sold for more than the outstanding balance of the loan, the homeowner will be entitled to the difference—less any money owed for liens levied against the property.

Can this be avoided?

The majority of foreclosures do not begin with a single late payment since most lenders grant grace periods. However, most will charge fees for any payment that’s late.

Unfortunately for borrowers, most lenders refuse partial payments to cover missed payments. It is common practice for lenders to simply demand one lump sum for all owed debt.

Following a single late payment, a second late payment will result in attempts at contact—such as phone calls—from a lender to a borrower.

Once a borrower is behind three months on their payments then the foreclosure process usually begins.

But by speaking with their lender about payment adjustments, borrowers may be able to avoid foreclosure.

Borrowers and lenders in the foreclosure process may seek a compromise that allows the homeowner to keep their home while the lender can continue to receive mortgage payments. This would benefit both parties in the foreclosure process.

These arrangements are called home loan modifications, which, while rare, are usually preferred by borrowers.