What Is Foreclosure? (Including Pre-Foreclosure and REO)
Foreclosure is the process by which a lender or servicer takes back a home after the homeowner fails to make mortgage payments. Some states require the lender to go to court (judicial foreclosure) and others do not (non-judicial foreclosure). In federal housing terms, a "pre-foreclosure sale" is another name for a short sale, and a home the lender or a guarantor ends up owning after an unsuccessful foreclosure auction or a voluntary conveyance is called "real estate owned" (REO).
What the law says
- The CFPB describes foreclosure as when the lender or servicer takes back property after the homeowner fails to make mortgage payments. CFPB, Mortgage key terms
- Freddie Mac's glossary defines foreclosure as a legal action that ends all ownership rights in a home when the homebuyer fails to make the mortgage payments or is otherwise in default under the mortgage. Freddie Mac, My Home glossary
- Foreclosure varies by state. In judicial foreclosure the lender files a lawsuit and the borrower can raise defenses in court; in non-judicial foreclosure the lender proceeds without court action, following steps that include written notices under a "power of sale" clause in the mortgage or deed of trust. CFPB, How does foreclosure work?
- Generally, borrowers must be notified if the lender or servicer begins foreclosure proceedings, and federal rules may apply to when foreclosure may start. CFPB, Mortgage key terms
- Under federal mortgage servicing rules, a servicer generally may not make the first notice or filing for a judicial or non-judicial foreclosure unless the loan is more than 120 days delinquent. 12 CFR 1024.41 (Regulation X), Loss mitigation procedures, as published by the CFPB
- After the required notices and procedures, the property is typically sold at a public auction to the highest bidder, which can be the lender; state laws govern the transfer and any further steps. CFPB, How does foreclosure work?
- Some states offer mediation before foreclosure. CFPB, How does foreclosure work?
- FHA's handbook glossary says pre-foreclosure sales, also known as short sales, are sales that generate proceeds less than the amount owed on the property where the lien holders agree to release their liens and forgive the deficiency balance. HUD, FHA Single Family Housing Policy Handbook 4000.1, Glossary and Acronyms
- An FHFA research note describes Real Estate Owned (REO) as an outcome of mortgage delinquency in which the servicer acquires the borrower's house, either through a voluntary conveyance by the borrower or after an unsuccessful foreclosure auction. FHFA, Mortgage Market Note 12-01, A Primer on Price Discount of REO Properties (2012)
- FHA's handbook glossary defines a HUD REO property (a "HUD Home") as a one- to four-unit home acquired by HUD through foreclosure or other acquisition on an FHA-insured mortgage, which HUD then offers for sale to recover the insurance claim it paid to the lender. HUD, FHA Single Family Housing Policy Handbook 4000.1, Glossary and Acronyms
- HUD says it does not buy homes; the homes HUD sells come into its possession as a result of defaults on FHA-insured mortgages. HUD, Frequently Asked Questions
- Buyers cannot bid directly on HUD-owned homes; offers must be submitted by a HUD-registered selling broker or agent. HUD Home Store, FAQ
FAQ
Does a lender have to go to court to foreclose?
It depends on the state. Some states require a court process (judicial foreclosure) and others do not (non-judicial foreclosure).
How soon after missed payments can foreclosure start?
Federal servicing rules generally bar a servicer from making the first foreclosure notice or filing until the loan is more than 120 days delinquent, with limited exceptions such as a due-on-sale violation or joining another lienholder's foreclosure.
What does "pre-foreclosure" mean?
In FHA's official terminology, a pre-foreclosure sale is another name for a short sale: a sale for less than what is owed where the lien holders agree to release their liens and forgive the deficiency.
What is an REO property?
An REO (real estate owned) property is a house a servicer, lender, or guarantor acquires after a delinquency, either through a voluntary conveyance by the borrower or after an unsuccessful foreclosure auction.
Where do HUD homes come from?
HUD says the homes it sells come into its possession as a result of defaults on FHA-insured mortgages.
What should I do if I receive foreclosure papers?
The CFPB stresses reading all mail and legal notices carefully and acting promptly. It points to HUD-approved housing counselors and suggests consulting an attorney if you have been served legal papers.
Related
- Buying a Foreclosed Home: What to Know
- What Is a Deed in Lieu of Foreclosure?
- How Long Does a Foreclosure Stay on Your Credit Report?
- The Foreclosure Process Step by Step
- Foreclosure Surplus Funds: Who Gets the Money Left Over?
- How to Stop or Avoid Foreclosure
- Foreclosure & Homeowner Law by state
General legal information, not legal advice. Laws change and local rules can differ; check the linked official source or talk to a lawyer about your situation.