What Is Foreclosure
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.
Step 1: Understand Mortgage Transactions
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:
- A promissory note documents your promise to pay the lender the money you borrowed. It’s a type of IOU. The promissory note records a debt for which you’re personally liable. You must pay the lender the balance due and currently owing on the promissory note. The promissory note is transferrable. If the original mortgagee sells the loan, the promissory note is signed over to the loan’s new owner.
- A mortgage, also called a deed of trust in some places, is a document that pledges a certain piece of property to secure the debt created in the promissory note. It creates a property lien. When the mortgage loan is transferred between parties, transfer must be recorded and documented in local land records. The document used in this case is called an assignment.
- If you don’t uphold your promise to repay the mortgage lender according to original terms and conditions, it can proceed to foreclose.
Step 2: Know the Foreclosure Players
The following players are typically involved in residential foreclosures:
- The borrower, or mortgagor, is the homeowner who borrows money from the mortgagee and pledges his or her home as security to the lender underwriting the loan.
- The lender is the mortgagee or lender who provides a loan to the borrower.
- The investor purchases loans from the original lender. Some mortgagees hold mortgage loans in portfolio. However, most lenders resell the loan to free up funds to write new mortgage loans.
- The mortgage servicer is the company to which you make monthly mortgage payments. It managers your loan on behalf of the investor or lender. Loan servicers collect and process monthly mortgage loan payments. They pursue foreclosure if the borrower stops making mortgage payments as agreed.
Step 3: Understand the Basics and General Steps of Foreclosure
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:
- A judicial foreclosure involves the court system. The lender must use the court to reclaim ownership of the property secured by the mortgage loan.
- A nonjudicial foreclosure requires the lender to follow the state’s foreclosure procedures. No court supervision is involved in this type of foreclosure.
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.
Step 4: Judicial Foreclosure Basics
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.
Step 5: Nonjudicial Foreclosure Basics
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:
- Mail a Notice of Default to advise you of how much time is available to get caught up on your past-due payments.
- Record the default notice in the land records office.
- Mail a Notice of Sale to tell you the date on which the home will be sold. Depending on state law, you may get a combined notice of sale and default, a notice of sale or notice of sale by posting or publication in the newspaper.
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.
- As in a judicial foreclosure, the property or home is sold at public auction where anyone may bid on it. The foreclosing party may bid on the property at auction as well.
- If your state allows the Right to Redeem, you’ll have a certain period of time to regain title after the foreclosure sale by paying the high bidder the sale price plus expenses and accrued interest.
Step 5: Know What Happens after the Sale
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.
Step 6: Deficiency Judgements
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.
Step 7: Defenses against Foreclosure
You may defend against a foreclosure action depending on your circumstances. Foreclosure defenses include:
- The mortgage servicer can’t verify that it owns the debt or it made a significant error
- You’re on active duty in the military services—you’re entitled to protection against foreclosure under the Servicemembers Civil Relief Act (SCRA)
- The servicer didn’t follow state laws for foreclosure
You may be able to raise the foreclosure defense:
- In a judicial foreclosure, raise the defense when you answer the foreclosure complaint. Engage an experienced attorney at this point if you can.
- In a nonjudicial foreclosure, you must file a lawsuit against the foreclosing party to bring up the 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.