The lender from whom you borrow the money wants to make sure that their investment is safe, so they secure the loan against the property. This gives the lender something to fall back on besides just your promise to pay. If you fail to hold up your end of the bargain, they can start the foreclosure process so that they can recoup their losses by selling your house.
You agree to these terms when you sign your loan documents. Your mortgage document, called the Deed of Trust, has a clause in it about default and foreclosure. You are in default on the loan if you are more than 30 days late on your monthly payments.
Lenders have three ways of getting your loan money back:
- You make payments for the length of the loan
- You sell the property and pay off the loan
- The lender goes to foreclosure to sell the property and recoup the loan
Lenders aren’t chomping at the bit to start the foreclosure process. It is expensive and time consuming, so it’s worth asking if they are willing to work with you on another option. If you run into a situation where you can’t make your payment on time, I recommend you contact your mortgage company and explain what is going on. Sometimes, they will agree to stretch your payment out a little bit until you get back on your feet. They’d much rather have you in the house making payments!
If the lender does initiate foreclosure, know that they have the right to come into your house and evict you in order to get it ready for sale. They’ll advertise the property for sale in the local paper, first notifying you that they are going to do that. After the legally required time, a sale will be held at the courthouse.
The concept is similar to a vehicle loan: A vehicle can be repossessed by the lender if the buyer does not make their loan payments. The lender then resells the vehicle to make back most or all of the money left on the loan. A foreclosure is like a repossession.