If you’re falling behind of mortgage payments, facing foreclosure, or in foreclosure, it’s important that you know something about the foreclosure process, including ways to avoid foreclosure, defenses against foreclosure, procedures and consequences of foreclosure.
Start with the foreclosure basics: understand what happens in foreclosure and how it generally works as well as your options to avoid foreclosure. Know the foreclosure process timeline and what happens if you face deficiency judgements. Read more to learn more about the general steps involved in foreclosure and what defenses may be available in the process.
Buying real estate typically requires a large amount of money. It’s uncommon for the buyer to pay for the home or property purchase price in cash. Instead, he or she usually makes a down payment in cash or through a down-payment assistance program and arranges a mortgage to cover the remainder of the purchase price.
Financing the mortgage involves a promissory note plus a mortgage or deed of trust:
The following players are typically involved in residential foreclosures:
If you default on mortgage payments, the lender or investor can use a procedure called foreclosure to force the sale of your home to get repaid for the debt owed on it.
The foreclosure process is different across the states. However, two types of foreclosure, judicial and nonjudicial, are common:
States use one of these foreclosure procedures most of the time. With few exceptions, your mortgage is typically foreclosed in court. Deeds of trust may be foreclosed without the need to go to court.
In both types of foreclosures, the foreclosing party (mortgage servicer, lender, or investor) must mail a notice stating that foreclosure will proceed if you don’t make payments you owe. In most cases, you have 30 days to pay the amount that’s past-due. Otherwise, the foreclosure process will start.
If your state uses judicial foreclosure, the lender or servicer begins the foreclosure process by filing a lawsuit in the state courts. You’ll get a copy of the petition or complaint and receive some time, such as 30 days, to respond to it.
When you don’t respond, the court will automatically grant the judgement of foreclosure to the foreclosing party. A public auction of the property allows the foreclosing party and members of the public to bid on the foreclosed property. The high bidder is the new property owner.
In a power of sale or nonjudicial foreclosure, the mortgage lender or servicer must take at least one of the following steps according to state requirements:
Each notice has time limits and specific requirements. A notice might be required to describe the property to be foreclosed, the amount you owe, and the amount of money needed to reinstate the mortgage loan plus interest and costs, and contact information to discuss the information within the notice.
You continue to own the property until the auction foreclosure sale. You’re legally allowed to stay in the property until that date. In some states, you may remain n the property until the expiration of the redemption period or until another action, e.g. sale ratification, happens.
If you stay in the home after the ratification of sale, the new owner (sometimes the foreclosing party) can take steps to evict you. You state may require the new owner to file a lawsuit to initiate eviction but, in some states, eviction is started with the foreclosure action.
In certain conditions and in some states, the new property owner must notify you prior to initiating eviction. This may give you a little more time to vacate. However, it’s usually best to vacate before the period expires according to the formal eviction notice.
If the property sells for less than the amount needed to cover the outstanding total debt, you’ll face a deficiency judgement. The deficiency judgement is the net difference between the auction sale and mortgage loan debt. Depending on your state of residence, the lender may be able to get a personal deficiency judgement against you.
Let’s say you still owe the lender USD 250,000. The property sells at USD 150,000 in the foreclosure sale. The deficiency in this case is USD 100,000.
In some states, the deficiency is limited to the difference between total debt and fair market value. If the fair market value is USD 175,000, you’d face a deficiency judgement of USD 75,000.
You may defend against a foreclosure action depending on your circumstances. Foreclosure defenses include:
You may be able to raise the foreclosure defense:
Whether you want to fight foreclosure or you’ve accepted the foreclosure and plan to move on, knowledge about the foreclosure process in your state can help.