What is Foreclosure? To different people it means different things, and I realize there is a lot of confusion about this topic even among Realtors.
I am not an attorney, nore a finance guru, but as a residential real estate consultant with foreclosure specific specialization, I will attempt to make a little order in the chaos. The following is a simplified explanation for clarity purposes.
Let us set a scenario. Dave bought a brand new home and moved in. At first he was paying the monthly mortgage payments on time and in full. After the first year however Dave's dog got sick, and he had to deplete his savings in order to pay the veterenary medical expenses. Soon there after his car died, and since his occupation required reliable transportation, he begrudgingly bought a new car through financing. Then, unexpectedly, Dave hurt his back and had to reduce his work load. Naturaly his income shrank significantly. At this point Dave found that he could no longer afford all of the expenses, and out of desperation he started falling behind on the mortgage payment.
The lender (mortgagee), from their end, sent warning after warning, threatening that they would "accelerate" the debt repayment if he did not catch up with his dues. This means that the bank would make the entire balance due immediately, and not according to the regular payment schedule. Unable to sell the house on the one hand, and unable to catch up with the delinquent payments, Dave had no choice but to watch this feared moment arrive. (This is not entirely true, as there often are some other alternatives before that happens, but we will talk about that another time.)
So, Dave receives a letter telling him that the rest of the mortgage balance is due immediately, or else it will be taken away from his possession. This is the point at which the clock starts ticking. At the end of the deadline given to Dave the lender would typically take the matter to court, and the court would start the foreclosure process. The lender hopes to receive some compensation for the debt, through the sale of the property in one way or another, at the end of this process.
Often the lender presents the property for sale at a public auction after the given deadline. People tend to confuse the auction itself, also referred to as the Sheriff's sale,with a foreclosure, but foreclosure is in fact just the legal process by which the lien holder, in most cases the lender or mortgagee, denies the defaulting borrower, ownership of the property. This could take place in many different ways, all of which are still considered to fall under the foreclosure category. The bank (lender) may recoop its losses through a foreclosure auction, a short sale, or repossession of the property and its sale as a bank owned property. To a buyer, foreclosure may present itself in various faces, as an auction property, a short sale, or a bank owned property (REO).
So, the main point I would like for you to take away is that foreclosure is not a type of property or type of sale, but rather the process in which the lien holder obtains the ownership of a real estate property in order to cover the defaulted loan.
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