What Happens When a Loan Goes into Foreclosure?

Mar 4th, 2008 @ 6:24 AM by MortgageMentor

With more and more families losing ground in the mortgage payment game, it might be prudent to explain the foreclosure process. Typically when a borrower falls behind on payments, the home doesn’t immediately go into foreclosure. Instead, the lender waits until the payments are delinquent 90 days. He then will send the borrowers a “breach letter” requesting (well, demanding really) that the total loan, including interest and penalties accrued so far, be paid. At this point, the next steps will vary depending on which state you live in. But the loan goes into a foreclosure status and stays there until the property has been sold at auction.

Following the auction, the loan might be liquidated, if the proceeds of the purchase were enough to cover it. If the house is not sold at auction, a situation that’s happening more and more, it might become REO (real estate that is owned by the lender). If this happens, the loan stays in REO status until somebody decides to buy the property — in this case directly from the bank — and the loan will finally disappear.

So when lenders report loans that are in foreclosure, these may be cases that have been in foreclosure before and have gone back out of the pipeline. They may stay in foreclosure for years, then suddenly find the means (a lottery ticket?) to pull out by bringing the loan payments current. The borrower occasionally manages to sell the home, thereby paying off the loan. And sometimes the loan is worked out so the status can be changed from “foreclosure” to “seriously delinquent.”