If a homeowner fails to pay on their mortgage loan then the bank holding the mortgage comes in and obtains the home in exchange for the money that was lent out to the homeowner. Often times before this happens however, the bank tries to work with the homeowner which we will discuss momentarily. When it gets to the point of foreclosure the bank is at the point of breaking relations with the homeowner.
Before the bank begins the foreclosure process on the homeowner, the lender generally will accelerate the debt, giving the homeowner a specific amount of time to either sell the property or completely settle the debt by paying off the loan. Now instead of having the initially agreed time frame to pay off the loan (generally 15 or 30 years), the homeowner now has to completely satisfy the loan within the specific amount of time given. This can be a matter of a few months and if the loan is not satisfied within that frame of time the bank may opt to put the home on an auction.
There are also times when the lender will reinstate the loan for the homeowner if they can bring the loan up to current and pay any incurred late fees. If the homeowner can get to the point of bringing the loan current and pay any incurred fees, the bank at this point will usually stop the foreclosure process. While preventing foreclosure, the homeowner will still show mortgage lates on his credit report which will make it harder for that person to secure another mortgage loan in the immediate future.
If a homeowner cannot satisfy the debt or get caught up on payments the foreclosure process begins. While a bank could technically take a homeowner to court and sue them for late payments, this usually does not occur because it is not in the best interest of the lender’s time and money. Since the mortgage note agreement gives the lender other ways to resolve the issues, the bank usually chooses to cut its losses and request the borrower to pay the loan in full which is called “accelerating the loan”.
When the bank accelerates the loan the homeowner usually cannot pay off the loan or sell the property within the time frame given and turns the property back over to the bank. Though, technically the bank has owned the property to begin with. This is due to the fact that they hold the first lien as collateral for the mortgage amount that was lent.
A foreclosure will not leave the homeowner with zero equity if the amount owed is less than what the bank will get for the home in the foreclosure process. However that scenario is become increasingly rare in recent years due to the falling values of homes in many states. In those cases the homeowner is left with zero equity and many feel it is better to walk away than to continue to pay for a home that no longer holds the value of the original loan. In that case the banks are the real losers because they are the ones absorbing the losses. This scenario is why we have a mortgage crisis today and is the reason so many banks continue to be in trouble.
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