Foreclosure is a legal procedure, by which a lender assumes responsibility for a property, subsequently evicts the mortgage holder and sells the property when the house holder is unfit to make full payment as conditioned in the contract.
Foreclosure stays on the credit report for as long as seven years and it affects the credit score. When this period of time is over, the foreclosure mark drops off the credit report automatically.
The house holder normally can begin foreclosure procedures at a time stipulated in the mortgage contract, usually not too long after a default condition arises. There are several types of foreclosure, two of which are most commonly used – by judicial sale and by power of sale.
By judicial sale foreclosure, or also called judicial foreclosure, is when the mortgaged property is sold under court supervision. The mortgage and the lien holders are the first to be compensated. Then, if any proceeds are left, the borrower is compensated at last. Foreclosure by judicial sale is present in every state of the US, and in some it is even mandatory. The foreclosure procedures begin when the lender files a lawsuit against the mortgagor. All parties of the foreclosure must be announced of the procedure. Notification terms are different in every state. After the exchange of pleadings at a hearing in court (state or local), a judicial decision is released.
By power of sale foreclosure, often called nonjudicial foreclosure, is authorized by many states of the US when a power of sale clause is enclosed in the mortgage, or if an act of trust with named clause was used, instead of a mortgage. In some US states almost all types of mortgages are deeds of trust. The procedure includes the sale of the house by the mortgagee without court supervision. It is normally a much faster and cheaper process than the first type of foreclosure (by judicial sale).
Some other types of foreclosure have limited availability, therefore they are considered to be secondary. Strict foreclosure is when the mortgage holder wins the lawsuit and the court orders the house holder by default to pay the mortgage off during a certain period of time. In case the house holder fails to do so, the property is entitled to the mortgagee with no requirement to sell it. Strict foreclosure is normally available if the cost of the house is lower than the debt.
Usually, people face foreclosure problems because of high debt that has made it difficult to pay the mortgage contract.
Foreclosure can bring additional problem if the mortgagor lives in a state where it is allowed deficiency judgment. Deficiency judgment is when the mortgagor has to pay the difference between the amount owed on the foreclosed house and the cost at which it eventually sells for at an auction. There are thirty-eight states that allow deficiency judgment.
Foreclosure can free the mortgagor of some financial burden, if the mortgagee does not use deficiency judgment.
It is recommended to consult a financial adviser or a debt counselor to get to know better what type of debt could possibly occur during a foreclosure.
Foreclosure does have an influence on the credit report. Depending on the initial credit score, its impact will be greater if the credit score mark is higher. Normally, foreclosure mark on the credit report lowers the credit score by 100 points or more, according to FICO, and it takes seven to ten years to completely recover the credit score.
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