Mortgage Foreclosure is the legal process a bank or other lender uses to take physical and legal possession of a piece of property whose owner defaults on the mortgage payments. All fifty states have rules and regulations that govern this process and protect homeowners from predatory lending practices and fraud. Although a bank may have an induspited contractual right to foreclose on property, a borrower should always attempt to restructure the mortgage or otherwise work with the lender, as the bank will want to avoid the lengthy and expensive foreclosure process.

A mortgage is a written contract that provides its holder a security interest in real estate. The person who borrowed money to purchase the real estate is referred to as the mortgagor. The bank that loaned the money for the purchase is referred to as the mortgagee. If the mortgagor defaults on the loan, the mortgagee is entitled to foreclose on the property, and obtain what is called a “deficiency judgement” if there is still an outstanding balance on the mortgage.

Most states conceptualize a bank's ownership interest in mortgaged real estate with the "lein theory". That is, until the balance of the mortgage is paid off, the bank has a lein on the title to the property, but is not the property's legal owner. However, some states classify a bank's interest under the "title theory", which means that the bank is the legal owner of the property until such time as the borrower pays off the mortgage in full. This is an important distinction in all existing and potential mortgage foreclosure cases. If the default occurs in a "lein" state, the bank will always have to go through a foreclosure process and re-take legal title to the property. However if the default occurs in a "title" state, the bank (as the legal owner of the property) can merely exercise its right to sell.

It is not uncommon to have more than one mortgage on a given piece of real estate. When this occurs, the law follows a "first in time" system regarding the mortgagee's rights. The first mortgage is known as the "senior" or "primary" mortgage, and all subsequent mortgages are considered "junior" or "secondary". The senior mortgage always has legal priorty over the secondary ones, regardless of the size of the debt.

Typically the mortgage foreclosure process begins with a letter from the bank demanding payment of the money owed. This is referred to as a “Notice of Default”, which is usually sent when the mortgage is three months past due. Most states also require that a bank give a mortgagor at least 30 days to cure the default before instituting formal foreclosure proceedings. Sometimes homeowners faced with mortgage foreclosure will simply choose to hand the deed to the home back over to the bank, rather than expend time and energy fighting the foreclosure process.

If the mortgage is still not paid after the notice has been sent and waiting period expired, a bank has a few different options for foreclosure. The first, and most common, is referred to as “judicial foreclosure”. In this method, the foreclosure process is overseen by a judge, who will order the property sold and the proceeds going to pay off the creditors in a pre-determined order. The second option is for the bank to offer the property up for public sale at auction. Under either alternative, a majority of states provide the homeowner a “right of redemption”, which allows them to cure the default buy paying the mortgage debt. In many states, a homeowner can exercise this right even after the bank has sold the property.