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Last Updated: Jan 10th, 2006 - 20:06:32 |
Definition of Foreclose
Let's start with the basics. According to The American Heritage dictionary, foreclose is defined as: 1. To deprive (a mortgagor) of the right to redeem mortgaged property, as when he has failed in his payments. Foreclosure is defined as: 1. The act of foreclosing, especially a legal proceeding by which a mortgage is foreclosed. In layman’s terms foreclosure is when a borrower fails to make payments on his or her house and the bank takes action to protect their loan.
How does foreclosure happen?
When someone buys a home they generally finance the purchase, in other words, they borrow money. There are two parties involved in this transaction. There is a lender, also called the mortgagee and there is a borrower, also called the mortgagor. The lender loans the borrower money to purchase their home and, in turn, the borrower gives the lender a promissory note to repay the borrowed sum of money at a given time.
The next step is the lender has to protect their loan amount, so they use the house as collateral. The mortgage becomes what is called a lien on the property. That house can’t be sold with clear title until that lien is paid off. The promissory note is a promise that the borrower will pay the lender back in a timely fashion and as stipulated in the contract.
When a borrower does not adhere to the terms of the agreement, meaning they don’t make their payments in time, the lender starts the foreclosure process in order to recoup their money.
Typically, a borrower must be 90 days behind in order for the lender to the start the foreclosure process. This means the borrower has not made payments in approximately three months. The borrower is said to be in arrears at this point. They owe the lender the 3 months of payments plus interest. The lender, under the terms of the original agreement, has the right to call the balance of the loan due immediately and starts the foreclosure process.
If the borrower does not pay the lender the money, the house will go to public auction and will be sold to the highest bidder. That is how Foreclose works.
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