Facing foreclosure? Here is everything you need to know to help you deal with it.
In this article:
The Foreclosure Process | What Is Foreclosure and How Does It Happen?
Foreclosure: What It Is
Foreclosure: it is a legal process wherein a lender attempts to recover the balance of an unfinished payment from a borrower via the forced sale of an asset used as collateral for a loan.
Foreclosure of a property securing a loan is one of the methods a lender might use to collect the remaining payments of a borrower who fails to pay his loan obligations. It is a series of steps that a lender takes to force the sale of the real estate property.
The lender then uses the proceeds of said sale to recover any and all unpaid debt. In theory, this sounds simple enough. In reality, however, it can be quite complex.
With the exception of professionals who deal with the process on a regular basis, facing foreclosure can be overwhelming. Foreclosure steps often vary by state, type of property, and the terms of the agreement between the lender and the borrower.
All the same, understanding the foreclosure process is of great importance. Properly complying with the process greatly impacts the cost, amount of time, and the outcome of the foreclosure action.
Foreclosure Rules Vary from State to State
Similar to most laws on real estate, foreclosure procedures and rights also vary from state to state.
These variations can be small. Examples include the number of times a lender has to publish a notice of a foreclosure sale or the number of days a borrower has to respond to a lawsuit.
However, the rights of the lender and the borrower can also vary significantly. An example of this is a borrower’s right of redemption or their ability to recover their property after a foreclosure sale.
They may do this either by paying the sale price, interest, and other costs to the winning bidder or, by paying the lender his outstanding balances and other costs before the sale happens.
Because the differences can greatly vary from one state to another, it is important to at least have a quick understanding of some of the most significant differences before looking into the foreclosure process itself.
1. Judicial Foreclosure vs. Non-Judicial Foreclosure
Judicial foreclosure in states that utilize it requires lenders to file a formal lawsuit with the courts. Afterward, they have to prove under the loan documents and state law, they can foreclose.
Additionally, a “power of sale clause” authorizes a lender to sell the property if the borrower defaults on his payments. If the said clause is in a mortgage, states that use the judicial foreclosure process will allow the lender to use a non-judicial foreclosure.
On the other hand, states utilizing the non-judicial foreclosure process use a deed of trust. The process does not involve the approval of a court. However, a trustee for the lender conducts the process which is still governed by both state law and loan documents.
Furthermore, mortgages that have a power of sale clause can generally use the non-judicial foreclosure process in states that use both mortgages and deeds of trust.
In cases wherein a power of sale clause states a foreclosure procedure, the parties involved will follow said procedure. However, it still has to comply with the minimum parameters allowed by law.
Most lenders choose to go with the non-judicial method since it is faster and less expensive compared to the judicial method.
2. Differences in Procedural Requirements
For the person with delinquent payments, foreclosure results in the loss of homes. It is only necessary to strictly comply with procedural items like the form used for various notices and the method.
For a foreclosure to be successful, it is also critical to know where, when, and what form said notices must take.
Though procedural requirements in different states have some similarities, they often still vary.
3. Time Period to Complete the Process
The length of time it takes to complete a foreclosure process depends on the state. In some, it can take up to seven months and even longer; in others, it only takes 30 days.
4. Right of Redemption
State laws again vary on the right of redemption of borrowers. Generally, in non-judicial foreclosures, redemption is not allowed unless the deed of trust grants the right.
Even in states that provide for the right of redemption, the period for a borrower to either exercise or lose his right to redeem still varies. Usually, it ranges from six months to one year.
Different factors can also affect the right of redemption or the period for the borrower to exercise it such as:
- The type of property
- If a lender obtains a deficiency judgment
- The year when the lender granted the mortgage
- If the borrower has lost his source of income after the foreclosure
- The terms of the mortgage or deed of trust
- If the lender was the foreclosing buyer
- The percentage of the delinquent loan amount during the time of the foreclosure judgment
- If the borrowers abandoned the property
- If the borrower relinquished possession to the new owner or the highest bidder at the foreclosure sale after the demand
- Requiring the borrower to redeem the property before the foreclosure sale
5. Deficiency Judgments
In some cases, the proceeds from a foreclosure sale are insufficient to pay the unpaid debt of a borrower. In those times, the lender can try to obtain a deficiency judgment against the borrower for the remaining amount.
Again, the rules regarding deficiency judgments vary from state to state.
In general, however, said judgments are not allowed by law if the parties used a deed of trust. Additionally, even in states that allow deficiency judgments, there remain various differences such as the conditions of its availability and the time period for it to happen.
A borrower who agrees to the sale of a property before a foreclosure, for example, might be able to avoid said judgment.
Summary of State Variations in the Foreclosure Process
The categories mentioned above are only some of the major foreclosure process differences between states. This Foreclosure Laws website gives more specific and detailed differences about the process in each state.
All the same, it is always best to consult with an attorney for all foreclosure-related issues.
The Foreclosure Process
Now, it is time to understand the actual process of foreclosure.
Step 1: Default by Borrower
A borrower who defaults on his loan signals the beginning of a foreclosure action.
This happens when a borrower fails to meet his loan obligations as stated in the loan documents. This includes failing to make payments on time or not maintaining property insurance.
Evidence of the borrower’s default is the key to a lender establishing that he has the right to foreclose.
Step 2: Notice of Default
After a borrower defaults, the lender sends the borrower a notice detailing the default. It includes the description of the default and the time period the borrower has to cure it.
If the default is on payments, for example, the notice has to state the amount owed. It also has to indicate the time period the borrower has to pay it.
The lender may begin the process of foreclosure if the borrower is unable to cure the default before the period ends.
In certain situations, the notice of default could also include a demand for the borrower to send the lender all rents earned by the property they currently have. It also includes rents that it collects through the foreclosure process that are not used for property expenses the lender approved.
Often, this is the case for commercial properties wherein the loan documents allow such collections.
Step 3: Workout
This “workout” is not actually a part of the foreclosure process. However, in order to avoid foreclosure costs, the time it takes, and all its other negative consequences, involved parties may attempt a workout.
In banking terms, this involves restructuring the terms of the loan to help avoid further defaults.
Some common workouts include a repayment plan, forbearance, loan modification, deed in lieu of foreclosure or short sale.
Step 4: Acceleration Demand
After the notice of default, the lender demands an acceleration of the loan if the borrower fails to cure the default in the given time period.
This means that the total remaining balance is now the amount due, not merely the missing payments.
The loan documents signed by both parties grants this right to demand acceleration. The time needed between the acceleration demand and the default notice varies.
The next step depends on whether the state is a judicial foreclosure state or a non-judicial foreclosure state.
Step 5A: Judicial Foreclosure: Lender Files Complaint
In a judicial foreclosure action, the lender begins the foreclosure lawsuit if the borrower does not respond to the demand of acceleration letter.
The lender starts this by filing a complaint or petition for foreclosure with the courts. Afterward, they issue summons to the borrower and all interested parties.
This notifies them of the suit and states the time period for them to contest the foreclosure. Finally, a lis pendens is put in the county records. This notifies the public, subsequent holders of lien, and other potential purchases of the foreclosure.
The lender files the suit in the county where the property is. They ask the court either for a judgment of foreclosure, an order for sale of the property, or a deficiency judgment.
The complaint names the borrower as well as all other interested parties. They may include loan guarantors, second mortgage holders or other liens junior to the lender’s mortgage, or even the IRS in cases where a tax lien encumbers the property.
The lender needs to notify each defendant separately through summons according to the method, form, and timing that the state law indicates.
This complaint states the argument of the lender for the relief they seek. This usually includes all the loan documents as well as the mortgage. It further states the default and amount due and identifies the property, too.
Some states further require lenders to file with the complaint an affidavit of fact. It should attest to the amounts due, remaining principal balance, owed interest, attorney fees, late fees, and other costs.
An individual who has personal knowledge of the contents of the affidavit needs to sign it.
In states wherein foreclosure is on commercial property, the lender may also file a complaint that includes a request for the court to issue an order that requires the borrower to deposit rents from the property to the court or another depository.
In general, the court may use said rents to pay expenses related to the property’s operation. Additionally, they may use said rents to complete loan payments.
This protects the property’s value during the pendency of said foreclosure action.
Step 5B: Non-Judicial Foreclosure: Notice of Default
In place of a court, a third party known as the “trustee” handles the foreclosure in a non-judicial foreclosure. This trustee is a neutral third party. Named in the deed of trust, the trustee owes a fiduciary duty both to the borrower and the lender.
Fiduciary: pertaining to the responsibilities of a trusted person to manage money or property belonging to another person or organization
The procedure detailed in the loan documents and the deed of trust needs to comply with the state law’s minimum borrower protections.
First, the lender has to notify the trustee that the borrower has defaulted. The lender also has to inform them of how the borrower can cure said default. The trustee then issues a notice of default.
He does this first by sending all interested parties a notice of proceeding and the foreclosure sale with the date. He also records a notice of the default in county records.
Finally, he publishes the notice in newspapers, posts on the property, and fulfills all other requirements stated in the deed of trust and state law.
Similar to a summons, a notice of default informs the borrower of the basis of the complaint of the lender. It further tells them the time period the borrower has to either contest the foreclosure or update their loan payments.
Finally, it informs them of the remedy that the lender seeks such as a money judgment or sale of the property.
Step 6: Appointment of Receiver
Lenders may ask for the appointment of a receiver in commercial foreclosures and in mortgages that allow it.
A receiver is a neutral third party a lender pays to manage the property. They ensure the borrower is not devaluing the property such as by not making the necessary repairs. They also make sure that the borrower uses the rent to pay expenses related to the property.
If the conditions allow it and the lender decides to request for receivership, they may do it as part of the foreclosure complaint. They may also request for it by petitioning the court upon a default.
The receiver is responsible only for direction from the court despite the lender paying for the receiver.
Once being appointed, the receiver operates all the property’s aspects. This includes the management of leases, entry into new ones, and the collection of rent.
It also includes the maintenance and repair of the property and the payments of all expenses related to the property. If the court and all related parties consent, the receiver is also responsible for selling the property and ending the foreclosure action.
Step 7: Borrower’s Answer and Defenses
If they want to, the borrowers can contest the foreclosure by filing an answer. They need to do this within the period of time provided in either the complaint or the notice of default.
Said answer should include the borrowers’ responses to all the statements the lenders made in their complaint. They could either accept, deny, or assert the lack of information to accept or deny each claim.
The borrower may also assert counterclaims and defenses they may have to the foreclosure. These may include the following:
- Statute of limitations
- Equitable estoppel
- Deficient affidavit of fact
- State law, mortgage or the deed of trust procedures were not followed
- Improper plaintiff or assignment (such as when a lender fails to establish ownership of the mortgage or loan)
- The borrower has paid the loan in full
- The lender’s miscalculation of the amount due
- Violations under Fair Debt Collection Practices Act (for residential foreclosures) or Truth In Lending Act
The court issues a default judgment for the lender if the borrower fails to file an answer on time.
In a non-judicial foreclosure, however, the borrower does not have the chance to make defenses or counterclaims to a court. As an alternative, they may consider suing the lender.
The borrower then becomes the plaintiff filing the complaint. They argue for either the stoppage or modification of the foreclosure based on their defenses.
Though this could be expensive for the borrower, they can use it to delay the foreclosure or encourage a settlement with the lender.
Step 8: Relief: Judgment of Foreclosure and Deficiency Judgment
With everything set, the court now considers the lender’s claims and the borrower’s defenses and counterclaims.
Afterward, the court issues a judgment. It could either deny the foreclosure or grant the relief that the lender seeks.
Lenders would often ask for a judgment of foreclosure, an order for sale of the property, or in some cases, a deficiency judgment.
Some states do not issue a deficiency judgment during this time period so the lender asks the court to retain jurisdiction over the action. This allows the court to consider the request for deficiency later.
The majority of states do not pass the title to the property until the completion of the foreclosure sale or the expiration of the redemption period.
In the states of Connecticut and Vermont, however, said foreclosure judgment could include an order to immediately transfer the title of the property to the lender.
The lender can start collecting the deficiency judgment amount. Methods for this include freezing bank accounts, placing liens on the assets of the borrower, and even garnishing wages.
Step 9: Notice of Sale
After an order for sale, the lender now notifies the borrower of the sale date, place, and time. The lender has to distribute this notice based on state law and the loan documents.
This could either be by mailing it to the borrower or posting it on the property. It could also be by publishing it in a newspaper or recording it in county records.
In general, there is still a chance that the borrower retains possession of a property.
This happens if he could negotiate a settlement with the lender. This could come down to the payment of the full amount, court and receiver costs, attorney’s fees, etc.
Step 10: Foreclosure Sale
A county clerk, trustee or another party can now conduct the sale.
The question of who conducts it depends on the terms of the loan documents and state law. It also depends on whether the foreclosure is judicial or non-judicial.
The sale or public auction happens at the location stated in the notice of sale. Often, this is on the county courthouse steps.
Postponement of the sale at the time and place where it was set can happen.
In general, anyone may bid at the auction. In some cases, however, bidders might need to provide proof that they can pay the amount that they bid.
Step 11: Objections to Sale
Some states give a certain time period for a party to object to the foreclosure sale.
In those states, the court does not give the certificate of title to the bidder until said period passes without objection. Should there be an objection, the court must first resolve it.
Collusion, mistakes, notices, or other procedural defects are some common examples of objections.
In some states, the court retains jurisdiction of the case through the sale. In those cases, a party may file an objection to the court as part of the foreclosure action.
Step 12: Certificate of Title or Deed of Trust Issued
After the auction, the highest bidder now receives the certificate of sale or the deed of trust for the property. This transfers to the bidder the title to the property.
A certificate of sale identifies the bidder, his rights on the property, and the sale amount.
In applicable states, the bidder might have to wait a certain time period before the transfer of the title. Where permitted, the responsible party first has to resolve sale objections. In states that allow redemption, the period first has to pass.
Step 13: Proceeds Disbursed
After the auction, the lender now receives the sale proceeds. Of course, this is still according to the court’s judgment or the terms in the deed of trust.
Proceeds are typically disbursed first for foreclosure expenses such as when the law entitles the auction holder to a fee. Then, it pays the lender’s money judgment and any junior liens.
Remaining proceeds then go to the borrower.
Step 14: Transfer of Possession (Eviction of Owner and Tenants)
Following an auction, the highest bidder now receives ownership of the property.
The borrower must vacate the property voluntarily and relinquish possession of it. Otherwise, the bidder has to enforce his right by bringing an eviction lawsuit under state law.
In some states, refusal to transfer possession forces the borrower to lose his right to redemption.
The new owner might also have to deal with the remaining tenants still in the property.
The court could issue writs of possession if the lender included the tenants in the foreclosure action. This forces the tenants to move out.
In commercial cases, the lender could also terminate the lease and evict the tenant.
For this to happen, the lease of the tenant has to include a subordination clause. This means that their interest in the property is junior to that of the lender’s.
However, the lender cannot force the tenant to vacate the property if the lease has a non-disturbance clause.
This gives the tenant the right to stay on the property provided that they are not in default. This right remains even if the property gets sold or foreclosed.
Step 15: Redemption
Again, the right of redemption gives the borrower the right to regain ownership of his property.
He can do this after a foreclosure sale by paying the winning bidder the sale price. On top of that, he also has to pay the costs within that time period.
To emphasize again, however, only some states allow redemption. The redemption period and other related conditions also vary according to state.
Borrowers can also lose that right if they fail to give possession of the property to the new owner within a given time period.
Abandonment of the property and owing more than a given percentage of the initial loan amount during the time of judgment could also force him to forfeit his right to redemption.
Step 16: Setting Aside a Foreclosure Sale
In judicial foreclosures, another way to set aside the sale to appeal the court’s decision. The borrower then files a motion to reopen the case or a new lawsuit to overturn the sale.
The procedural requirements, however, vary in each state. This includes the time period allowed to take these actions.
In non-judicial foreclosures, the borrower has two options. He may have the chance to object to the sale in the confirmation proceeding should the state require a court to confirm the sale. He could also bring a separate action that challenges the validity of the sale.
In both cases, time requirements and procedures follow the state law.
Foreclosure is simple enough to understand. However, the road towards it can be long and winding.
All the same, the statutes of each state would often detail explicitly their foreclosure rules. When facing foreclosure, it is important to seek the advice of a legal real estate attorney who can help you with this complex process.
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