What Does Foreclosure Mean?

Mar 17, 2023 | Mortgage Guides

Foreclosure Uncovered: What It Means for Homeowners and Buyers

Foreclosure is an essential step to understanding the world of real estate. Although foreclosures are not typical, in the unfortunate circumstance that you are in, it is important to realize what transpires and how to mitigate loss.

‍This guide will examine foreclosures in detail, from how they work and the laws in place to prevention strategies and alternative methods. Continue reading to learn what foreclosure means and much more.

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What Is Foreclosure?

Foreclosure is the process when borrowers fail to make mortgage payments. When a home forecloses, the lender takes possession of the property. Lenders have to wait a minimum of 120 days before they can begin legally acquiring the home. If the homeowner defaults on payments, the financier retakes the house and sells it to repay the mortgage.

Loan Default

A loan default occurs when the borrower fails to make payments in accordance with the loan’s agreed terms and conditions. That may transpire for many reasons, but it is often due to financial hardship or a borrower mishandling a loan. Loan defaults have significant ramifications for the borrower, including hurting their credit report, wage garnishment, loss of collateral, and legal action on behalf of the lender.

Short Sale

In the mortgage world, a short sale is when a house gets sold for less than the remaining amount owed on the mortgage. That means the lender cannot recoup their loan. In this situation, most lenders either accept a reduced amount from the sales to avoid the process of foreclosing the property. However, some creditors opt to foreclose regardless. Lenders often require the borrower to prove financial hardship to cooperate with the sale. The lender may also require the borrower to reimburse part of the deficit.

Mortgage Modification

Mortgage Modification is when a lender and borrower agree to modify the agreed-upon terms to make payments more affordable. That may include forgiving a portion of the balance, extending the life of the loan, or lowering interest. Lenders prefer to avoid foreclosure as much as borrowers because it is an expensive and complex process; instead, they would rather modify loans when borrowers experience financial hardship.

Property Tax Lien 

Property Tax Lien is the legal claim that a governing entity, such as the county or federal government, secures unpaid property taxes. This lien provides a legal right to the property until the taxes are paid in full. If the taxes remain unpaid long enough, the government can foreclose the property to recoup the lost property tax.


Repossession is the process of a bank or financial institution taking ownership of collateral a borrower has defaulted on. The most common form of repossession is when a lender repossesses a car on which a borrower has failed to pay. Other collaterals include a boat, real estate, or even high-end electronics. This is a legal process, and there are guidelines a lender must follow.


Bankruptcy is declared by individuals or businesses when they cannot pay their debts. When declaring bankruptcy, some or all the debts are discharged or restricted. Bankruptcy is filed in federal court. There are several bankruptcies that depend on the individual or business and the nature of their debt.

Foreclosure Prevention

Preventing foreclosure is a step that many homeowners don’t consider. When foreclosure seems imminent, it is easy to despair at the prospect. However, there are several steps that you can take before foreclosure to either ease the process or prevent it entirely. Learning about the process of foreclosure is essential to preventing it.

Foreclosure Process

These are the legal steps a creditor takes to repossess a home when the borrower has defaulted. The process begins with the lender sending a notice of default, which informs the borrower they are not paying the loan and that foreclosure will start if the default is not tended to.

‍Then, the lender sends a notice of sale to the borrower, informing them of the date and time of the house sale. The property is auctioned off, and the profits are used to pay the mortgage. The lender may choose to take legal action if the auction sale does not cover the outstanding debt.

Foreclosure Alternatives 

There are several routes a lender and borrower may take to avoid foreclosure. The most common alternative is a mortgage modification, in which contracts are renegotiated to lower costs.


A reinstatement is a last resort for borrowers who have the resources to repay the defaulted amount but have difficulty catching up. A reinstatement involves the borrower repaying the deficit in a lump sum.

Mortgage Forbearance 

Forbearance is a pause for mortgages. It is a temporary contract between the homeowner and the lender that allows the homeowner to make reduced payments or even stop making payments for some time. At the end of the agreed-upon period, the borrower repays the deferred amount via a repayment plan or lump sum. This option is used by homeowners who have encountered unforeseen financial difficulties.

Deed In Lieu of Foreclosure

A deed in lieu of foreclosure is a legal agreement where a lender agrees to release the borrower from their debt, and in exchange, the borrower transfers ownership to the lender. It prevents the expense for the lender and saves the borrower from the negative impacts of foreclosure. This process may still affect credit scores and could be taxable. However, it is less impactful than a foreclosure.

Foreclosure Laws and Risks

Foreclosure is a complex legal process, and so it has many laws and risks.

Foreclosure Laws 

These are the government-enforced rules a lender must follow in enacting foreclosure. They vary from state to state and also change depending on whether it is a judicial foreclosure. These laws include notice requirements, auction rules, and rights of redemption.

Foreclosure Risks 

Along with the stress of having property seized, there are several financial consequences. Foreclosing can take 160 points off of a credit score. A foreclosure makes it difficult to secure another mortgage, and the equity in the home is lost.

Foreclosure Counseling 

Foreclosure counseling services are provided to at-risk homeowners to help them understand their options, including government-provided plans to help them recover. That can entail modifying the loan, negotiating a repayment plan, or providing financial education.

Bottom Line

Understanding foreclosure is a crucial first step in learning about the real estate market. Although foreclosures are uncommon, it is critical to understand what happens and how to minimize loss if you find yourself in this sad situation.

Contact a Wesley Mortgage representative today for more information or questions about how mortgages work!

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