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Loan Glossary

Foreclosure:

A legal process in which a secured creditor, often a bank or a mortgage lender, forces a sale of or repossesses real property (immovable property) as a result of borrower.s noncompliance with the agreement between the lender and the borrower. The agreement between the lender and the borrower is commonly called a mortgage. The most common violation that would result in foreclosure is a default in payment.

There are two commonly used types of foreclosure in the United States, the rest are only a possibility in limited state(s).  The two common types are foreclosure by judicial sale and foreclosure by power of sale.

Foreclosure by judicial sale is the most common type of foreclosure – it is available in every state and is the required method of foreclosure for many of the states.  This type of foreclosure sale is performed under the supervision of a court and the proceeds are first distributed to the lender to satisfy the outstanding mortgage, then to satisfy any other lien holders, and the left over amount (if any) is distributed to the borrower.  All proper parties are required to be notified of the foreclosure.  Given that this is a legal action, this type of foreclosure usually includes a judicial decision following a short trial.

Foreclosure by power of sale is the second most common type of foreclosure.  This type of foreclosure sale is performed by the mortgage holder, rather than through the supervision of a court.  Since there are is no legal action and the judicial party does not get involved, this type of foreclosure is a more expedited way of foreclosing on real property.  Similar to foreclosure by judicial sale, the proceeds from the sale first go to the mortgage holder (lender), then to any additional lien holders, with the remainder being distributed to the borrower.  Majority of states allow this method of foreclosure.

Additional methods of foreclosure are available in limited states; thus, being classified as minor methods of foreclosure.  The most common minor method of foreclosure is strict foreclosure.  With this type of foreclosure, when the borrower defaults on a mortgage, the court orders the borrower to pay the lender within a given period of time.  If the borrower is still unable to pay, the lender automatically obtains title to the real property with no further obligation to hold a sale.  Strict foreclosure was the original method of foreclosure, but currently it is available only in handful of states.