Over the past few years, people have been discussing the problem of home foreclosures like never before.  The pop of the housing bubble, foreclosures spurred by upwardly adjusted ARMs and a host of other factors has boosted the number of home foreclosures to previously unthinkable levels.

Lost in all of that conversation is the fact that many people don’t really understand what foreclosure is.

Definitionally, it’s not hard to understand.   You can find dozens of definitions of “foreclosure” and almost all of them will look very similar to this one, offered by the Agricultural Marketing Resource Center:

Foreclosure – The legal process by which a lien against property is enforced through the taking and selling of the property.

Put into the sense we usually use the term, it refers to what happens when someone fails to meet their agreed upon mortgage payment and the lender attempts to satisfy the remainder of the obligation by taking possession of the home.

Definitions, however, will only get us so far.  Foreclosure is a process.  That means you need to have some sense of what happens during the process to truly understand it.

Foreclosures operate under different rules in different jurisdictions.  As such, this overview of the foreclosure process shouldn’t be considered the way the process works.  It’s one way.  And it’s kept sufficiently vague so as not to mislead the reader.  If you’re dealing with a foreclosure situation, you should seek qualified advice and resources specific to where you live.  For instance, the State of Michigan (which has been hit very hard by foreclosures) has an informative guide to the process for residents of the state.  There are specific resources for those who live outside of the US in Canada, as well.

Foreclosures start with a missed payment.  Your lender will notice that you didn’t get your check in on time and will send you a letter and/or call you on the phone to “gently” remind you to pay up.

If you fail to make the payment and then miss a second consecutive payment, your lender will become more interested in what’s happening.  They’ll want to find out about your situation and your ability to catch up on the loan and to make future payments.  If you haven’t been working with your lender and/or a trusted adviser already to find a solution to your situation, this is a good time to get started.

If you miss a third consecutive payment, the lender will send you a letter known as a “Notice to Accelerate” or a “Demand Letter”.  This correspondence will advise you that you have 30 days to pay all past due amounts or to make a mutually agreed upon arrangement.  It will also let you know that if you don’t follow through, that the lender will start foreclosing on your property when the deadline hits.

If you then miss a fourth consecutive payment, you’ll be right on the verge of the Demand Letter date.  When that hits, your lender will direct all of your future interactions about the matter to their attorney or legal department.  From here on out, those attorney fees will be going on your bill, so to speak.  If you later move to resolve the outstanding obligation, that amount will also include the cost of the lender’s representation.

The next step in the foreclosure process is the Sheriff’s Sale (sometimes referred to a Trustee’s Sale or Public Trustee’s Sale).  This is what happens when the lender’s legal representatives schedule the sale of your home.  In a sense, this is the moment of true foreclosure.  The law requires that you be notified of the sale, but the standards for that will vary based on your location.  The amount of time between the receipt of your Demand Letter and the sale date will also vary.  That’s why it is so important to understand how foreclosure works in your state if you’re involved in one of these situations.  You don’t need to pack up your stuff and leave on the day of the sale, in most cases.  It’s the foreclosure date, but it isn’t the moving out date.

That doesn’t happen until the period of redemption passes.  The period of redemption is a legislatively mandated block of time following foreclosure during which you can pay all outstanding obligations, fees and penalties in order to recapture legal possession and an ownership interest in the property.  The length of the period of redemption will vary based on jurisdiction.

That’s how a foreclosure works.  When you understand the process, it’s that much easier to understand the term, the repercussions of foreclosure and the options you may have if you’re in a difficult situation.