When you take on a financial responsibility such as owning a home, you generally take out a loan. There are those that do not, but for the average person, a loan is necessary. This loan is through a bank or other financial institution. They make an agreement with you for providing a specific amount of money to help with the purchase of the home and you sign an agreement to pay them back over a specified duration with interest.
Being unable to pay on your home loan puts you into default. Once you are in default, this means you have failed in making a payment. The bank will send you late notices and give you the opportunity to pay back the missed payment or payments because things do happen and they just want to get paid. If you are unable to work out an agreement with your lender then they have the right to foreclose on the property.
The Rules of Foreclosure
Every state has its own rules of foreclosure so there is some variation between states for the process. This can include the number of times a lender in default must publish a notice of foreclosure or the number of days they have to respond to the bank lawsuit. This can include the lenders right to redemption or their right to stop the foreclosure.
The bank holds the title to your home mortgage until you pay off the loans you owe them for the purchase of the home or property. As the holder of the mortgage, they have the proof that you failed in your obligation to pay them for the property and they have the right to file a lawsuit to get back theirs.
A Judicial Foreclosure
A power of sale clause is a section added to a mortgage which allows the bank the right to sell the property if the lender enters default. A judicial foreclosure is one in which this clause is missing. This is a standard clause added to multiple states’ mortgage documents and with it missing the case goes to court.
In a judicial foreclosure, the lender is suing for their property. Through the foreclosure, the home is used to pay back the unpaid debt owed by the original buyer. This means the sale of the home occurs after the court confirms the default of the loan.
A home auction takes place to pay back the lender of the loan. In the event the home sells for less than the original loan amount; than the former owner is still responsible to pay back the amount remaining on the debt.
Judicial foreclosures are a way to protect those buying property. Unscrupulous lenders do defraud people of their homes and the judicial process prevents those people from profiting from their dishonesty. It also saves people from losing their homes through no fault of their own.
A Non-Judicial Foreclosure
In a non-judicial foreclosure, a deed of trust is required to begin the foreclosure proceedings. The deed of trust and the mortgage along with the power of sale clause can then initiate the foreclosure. The power of sale clause dictates how the foreclosure is to proceed. Certain states do have particular laws that add additional limitations or procedures to the foreclosure. A non-judicial of foreclosure is faster than a judicial method and less of an expense to the lender so this is the preferred method of foreclosure.
The Right of Redemption
This is a right that only certain states grant. It is only available in judicial foreclosures unless the deed of trust used in the non-judicial foreclosure has specific terms for the right of redemption worked into it. In most cases, the borrower has the right to try to redeem the lost property. They usually have up to a year to do so.
Depending on the state, the borrow has the right to try to redeem the property before it is sold and pay on at least a percentage of the unpaid loan before the final judgment is issued in the matter. They also have the right to abandon the property or allow for new owners to assume possession.
There are many factors that go into allowing the right to redeem the property including income loss, when they got the mortgage, whether a deficiency judgment is entered, the type of property and any terms worked into the deed of trust upon its drafting.
A deficiency of judgment occurs when the sale of the home is not enough to pay back the unpaid debts. The lender can get a deficiency of judgment to redeem the monetary amount left unpaid. If a deed of trust is part of the foreclosure this is not always possible unless specified in the document. This is avoidable if the borrower agrees to sell the property to pay back the debt before the deficiency judgment reaches a judge.
The Steps of Foreclosure
As stated above, each state has its own process to facilitate foreclosures so there will be some variation depending upon the state.
- Default – The buyer enters default when they fail to make a payment or other obligations on time. This initiates the foreclosure process as the lender will have proof of non-payment to start the process.
- Notice of Default – The buyer will receive a notice of default when they fail to make a payment. The notice will include a time frame for them to make a payment on their loan and what will happen if they fail to do so on time. The notice will include the amount owed and when the buyer has to pay them back. If the buyer fails in this obligation, the foreclosure will start.
The first part of the non-judicial foreclosure is the complaint. The complaint will be filed by a law firm on the behalf of their client, usually a bank, that will lay out how the foreclosure process will be commenced and what the buyer has to do to meet their obligations to the lender.
In a non-judicial foreclosure, a trustee is responsible to the lender and the borrower. They will facilitate the process of foreclosing on the property and alerting both the lender and the borrower to the proceedings. They will alert the court at this point to the actions set in motion.