Foreclosure is a legal process that happens when a homeowner (although “borrower” might be a more appropriate term from the perspective of the lender) is unable to make mortgage loan payments for a significant period of time. After three to six months of missed mortgage payments, a lender will issue a Notice of Default with the County Recorder’s Office. This notice is to let the borrower know he is at risk of foreclosure—and when they foreclose, the current owner will be evicted. After receiving the Notice of Default, borrowers can try to settle their loan debt with their lender either through a short sale or by paying the mortgage balance they owe. This period is called pre-foreclosure and can last anywhere from 30 to 120 days after receiving the Notice of Default. If the debt is not recouped, lenders will step in and foreclose on the property. To foreclose, they’ll schedule a foreclosure auction to sell the house to a third party.
Foreclosure auctions will be advertised in local newspapers and are typically held at either the property or the local courthouse. If no one buys the home at auction, the lender becomes the owner and it’s considered a bank-owned or REO (real estate–owned) property. Another option to avoid foreclosure is to do a deed in lieu of foreclosure. A deed in lieu of foreclosure is a transaction where a homeowner transfers title or ownership of the property to the lender in exchange for being released from their loan debt-free and clear.