The foreclosure process isnt as mysterious as it may seem. Due to federal and state laws, lenders must follow a specific process in order to foreclose on a property. Understanding the process will help you find investment opportunities.

First, youll need to understand when a lender is allowed to foreclose. The process starts with the mortgage itself. A mortgage creates five covenants:

1. The homeowner promises to pay the principal mortgage debt

2. The homeowner will insure the building against fire or damage to help protect the banks interest in the property

3. The building or dwelling cannot be demolished or removed without the consent of the bank

4. The entire principal will become due in the event of default of payment of principal, interest, taxes, or assessments

5. The bank will consent to the appointment of a receiver in the event of foreclosure

The first three items are agreements the homeowner must adhere to. If those covenants are breached, the bank must pursue numbers 4 and 5. (Why the word must? Because banks are really trust officers: they arent loaning their own money, theyre loaning money that belongs to depositors. They dont have the right to take risks with other peoples money, so they have to follow these covenants.)

The last two covenants give the bank the means to foreclose. One provides for the appointment of a receiver typically a lawyer who conducts the sale of the property. The other allows the bank to accelerate payments and ask for the entire balance. If the banks lawyers take a homeowner to court they want all of the money, and if it cant be paid they want a judgment against the homeowner. Simply put: they want out of the deal because the homeowner has not lived up to his or her obligations.

Its important to note that until a judgment has been obtained the homeowner is not truly under threat of foreclosure. Once the judgment is obtained the homeowner can be put out of the property immediately.

After a judgment has been handed down against the homeowner, a time is set for the public sale of the property at auction. If the homeowner cant come up with the entire amount of the judgment award before the sale thats it: no more delays, no more compromises ? the sale will be held. Often these sales are held at the courthouse, and in many cases are actually held on the courthouse steps.

The court then appoints a receiver again, typically a lawyer to conduct the sale of the homeowners property. Ordinarily, real property cant be transferred without both parties in the purchase agreement signing the transfer deed. Since the homeowner is unlikely to voluntarily sign away his or her home, the receiver has the legal authority to sign a valid deed transferring the ownership to a new purchaser.

Lets look briefly at the stages of foreclosure. To make it simple, well pretend youre a homeowner facing financial difficulties.

If youve missed a payment, youre normally sent a letter documenting the missed payment and requesting immediate payment of the past-due amount. Once youve missed several payments, youll be sent a letter from the banks lawyer. Receiving a letter from the lawyer means youre in trouble; you havent just committed an oversight the bank wants corrected but are now considered a serious problem debtor. When you hear from the lawyer, it means the bank has committed resources (time and money) to getting you to pay on time so theyre serious.

If you cant reach an agreement with the lawyer youll be served with a summons. (The lawyer has very little reason to negotiate, so normally the only agreement youll be able to reach is that youll make your loan payments on time starting immediately.) After service, which is the process by which youre physically presented with the summons, the attorney will also file papers with the county courthouse. All other individuals with claims against the property ? theyre called junior obligations ? like second mortgages, judgments, or other liens, are served with papers so they have the right to try to protect their interests as well. (Its important to note that if the foreclosing party is negligent in notifying junior lien holders, those creditors have a valid claim for repayment against the eventual new owner of the property. Thats why purchasing title insurance when buying foreclosure properties is absolutely essential: you protect yourself against subsequent claims you didnt know about. After all, you dont want to have to be responsible for a lack of attention to detail by the foreclosing party.)

To enforce money judgments you have to be served personally. Thats one reason foreclosure actions can take so long ? the homeowner(s) must be tracked down and physically handed the summons. Often the homeowners wont want to be served and will do their best to avoid the server. Each jurisdiction has different laws and rules, but generally speaking if a person cant be located and all reasonable efforts have been made to find them, a procedure for publication is put into place. This typically consists of a public notice printed in the classified section of the local newspaper.

Most jurisdictions also require public notice whether or not the homeowner has been served. This allows parties with a legitimate claim to come forward to protect their interests.

After the publication process is complete the foreclosure action will proceed. If you cant come to an agreement with the banks lawyer, and cant come up with the funds to pay off the loan, your property will be sold at a foreclosure auction, and youll be evicted from the property ? if you havent already left.

The foreclosure process is extremely painful for the homeowner. The legal proceedings can take months to complete. The homeowners are subjected to pressure from banks and lawyers, public notice that their home is in the foreclosure process, and the realization that they will soon lose their home.