What Happens When a Bank Forecloses on a Mortgage Loan?

What happens when a bank forecloses on a mortgage loan? This question was sent in by a reader of the home buying blog. I think we've covered this topic before, but it does come up a lot so I figured I could cover it again.

Here's what happens when a bank forecloses on a home. The process will vary from one state to another, because foreclosure laws vary between states. But the basic process is the same regardless of where you live.

Most banks will actually try to work with the homeowner before they file foreclosure paperwork. They understand that times are tough right now, and that many people are facing unemployment and other problems that prevent them from making their mortgage payments. It's also important to realize that banks don't want to foreclose on a mortgage loan. The process is time-consuming for them, and it's also expensive. Banks are in the process of lending money, but they're not in the process of maintaining properties and trying to sell them. So if a foreclosure can be avoided in any way, the bank will generally work with the homeowner to pursue that goal.

Let's say the bank contacts a homeowner about the missed payments, but the homeowner is simply unable to get caught up on their mortgage payments. What happens next is generally a foreclosure filing. This is a paperwork step the bank must go through in order to move the process forward. It usually involves filing a foreclosure notice with the county courthouse, in the county where the home is located. After this, the process will vary quite a bit from one state to another. In some states, the foreclosure process is pretty swift. In other states, it takes many months for the bank to actually repossess the home.

Working With the Bank to Avoid Foreclosure

We're talking about what happens when a bank foreclose on the mortgage loan. But it's just as important to understand that you, as a homeowner, have options to avoid foreclosure. As I mentioned earlier, banks are willing to work with homeowners who are falling behind on their payments. If your financial problems are temporary, and you feel that you can get back on track with your mortgage payments, your bank can probably work out some type of repayment plan. If your financial problems are more permanent in nature, you still might be able to avoid foreclosure. In the latter case, a real estate short sale might be in order.

If the foreclosure process continues, and the homeowner is unable to sell the home or get back on track with the mortgage payments, then the bank will eventually foreclose on the property. The homeowner will be served papers from a sheriff's deputy or some other local authority. This is a notice of foreclosure, and also of the forthcoming eviction. Eventually, the bank will take ownership of the property and try to sell it through a real estate auction or some other means.

So that's what happens when a bank forecloses on a mortgage loan. Remember, if you're in a situation where you feel you might be foreclosed on, it's important to explore your options to avoid it. We have a lot of information on this website to help you do that, and you can find it by using the search bar at the top of the website.