The document that secures the title is a deed of trust or trust deed. The trust deed contains a provision called a power of sale clause which allows a trustee to sell the property in order to satisfy the underlying defaulted loan.
Upon default, the trustee is authorized to foreclose the mortgage and put the property up for auction to be sold to the highest bidder. In the event the property is not sold at auction, the foreclosing lender then takes title to the property. Junior lien holders are stripped of their interest in the property, and any potential claims against the property (such as unpaid subcontractors, etc) which occurred before the trustee sale are invalid.
Some states do allow a post-sale statutory right of redemption, the right of a mortgagor (homeowner) to recover mortgaged property from a judicial sale or foreclosure by paying the lender the outstanding principal and interest due, plus the lender’s costs in foreclosure.
If a homeowner loses his or her home through foreclosure, the lender may forcibly evict from the property in as little as 30 days.
The effects of a foreclosure on an individual include the loss of home and all equity, a serious derogatory impact to the credit score serious which remains on for 7 years. May also affect insurance and employment, especially if job is security-sensitive.
The process of foreclosure:
- Borrower misses payment(s).
- Lender attempts to contact borrower.
- Lender sends notice of default (NOD), officially starting the foreclosure process.
- If borrower does not reinstate loan, notice of sale is recorded and published.
- Foreclosure sale (auction, trustee’s sale, sheriff’s sale) is held.
- If unsold at auction, ownership is involuntarily transferred to lender.
The notice of default period is 90 days. After the 90 days, a lender can record and publish a notice of sale within 10 days after the 90-day period, meaning a distressed borrower can lose their home as quickly as 100 days from the date they miss their first mortgage payment.
Mortgage lenders have come to understand it is more advantageous to work with a troubled homeowner to A) keep their home through a mortgage modification or B) liquidate the property by completing a short sale. The last resort is for the lender to foreclose on a home via a trustee sale; however, if the homeowner is unwilling to pursue options to foreclosure, the lender has no other choice to seize the asset.