Most people are familiar with the term foreclosure, but few fully understand how the process works. Whether you’re a first-time homebuyer or a real estate investor, this knowledge can be very valuable. While individual states specify different foreclosure procedures, the basic process is the same for all.

Foreclosure is the legal procedure that a lender initiates to reclaim ownership of property after the borrower fails to make payments as agreed. The procedure terminates the rights that the borrower was granted through his mortgage or deed of trust. This gives the lender the legal right to remove the property’s title from the borrower so the property can be sold. The lender recaptures its loan proceeds.

Judicial and Non-Judicial
Depending on the state in which the loan is defaulted, the process is either a judicial foreclosure or a non-judicial foreclosure. The key difference is the length of time it takes a lender to foreclose. In a judicial procedure, it generally takes the lender 12 - 18 months to foreclose, compared to just 4 - 12 weeks in a non-judicial procedure.

States with judicial procedures issue legal instruments called mortgages while states with non-judicial procedures issue deeds of trust. The mortgage foreclosure process takes longer since a lender must initiate a judicial procedure through the courts to obtain a judgment allowing the foreclosure and sale.

By contrast, a default on a trust deed does not require lengthy court action because the title stays with the lender until the loan is fully paid. Plus, the lender has the power of sale which allows the trustee to sell the property more quickly.

Here are the procedural differences in mortgage and trust deed foreclosures:

Trust Deed Foreclosure:
There are three principal parties involved in a trust deed foreclosure. They are (1) The lender (2) The borrower and (3) The trustee (a person legally empowered to hold or control a piece of property for another person). When the borrower fails to make the required payments on the loan, the trustee records a Notice of Default, sends a copy to the borrower, and after a specified holding period, a Notice of Trustee Sale is posted on the property.

The Notice of Trustee Sale is advertised to the public for a required period and if the borrower does not bring the loan current, the property is auctioned to the public.

Mortgage Foreclosure:
A mortgage is a legal contract in which the borrower uses the property as collateral. If the borrower fails to make payments, the lender can take legal action to collect. The lender typically sends multiple notices to the borrower requesting information about the missed payments in an attempt to work with the borrower to bring the loan current. If these efforts fail, the lender uses an attorney to initiate foreclosure.

The attorney files several legal documents including a lis pendens which is a public notice indicating legal action is pending on the property. If the borrower fails to respond, the attorney submits a report to the court with the facts of the case. The judge can then issue a Judgment of Foreclosure and Sale in favor of the lender. At this stage, an auction sale is advertised in accordance with local statutes.

Opportunities to Buy Foreclosure Properties:
You can buy a foreclosure property at one of three stages:

1. Before the Auction (for Preforeclosures or Notice of Default properties). At this stage the owner has defaulted on his loan and in many cases would like to find an alternative that avoids foreclosure and its damage to his credit history.
2. At the Auction (for Auction or Notice of Trustee Sale properties) In this situation the owner has defaulted on his loan and been unable to bring the loan current. The owner is out of time and the property will be sold at a public auction to the highest bidder.
3. After the Auction (for REO, Bank Owned or Government Owned properties) If an auction’s minimum bid is not met, the property’s ownership rights are transferred to the lending institution that supplied the loan. Usually, banks are eager to sell these properties so they can get their money back and issue a new loan.