Foreclosure is the process by which the lender takes control of the property which was pledged as collateral for the mortgage debt and sells the property to raise money to pay on the debt created by the Note. The sale extinguishes the borrower's interest in the property although some states have redemption period after the sale. Other interests are also extinguished if the foreclosure is done properly, including the rights of other owners, spouses, junior mortgages, lienholders, and some taxes. The foreclosure process is very different depending on whether it is judicial or non-judicial.
In the US, approximately half of the states permit non-judicial foreclosure. The rest of the states require judicial foreclosure. A few states allow both.
The below is a general guide to how the nonjudicial foreclosure process works. However, the process is different in each state, accordingly the material here is intended as a general guide. It is for educational purposes only, is not intended as legal advice.
In order for the interests of all parties who may have a claim to the property be extinguished, the foreclosure must be done properly, and all interested parties must be given proper notice as detailed by state law. The typical interested parties are other owners of the property, spouses, junior mortgages, lienholders, and some taxes. If the borrower is deceased, his or her heirs and estate are interested parties.
Non-judicial foreclosure is preferred by the lending community, since it is typically faster, easier and cheaper. Non-judicial foreclosure is normally quite straightforward and quick. In order for it to be possible to hold a non-judicial foreclosure, it was necessary that the original mortgage loan documents included a deed of trust, conveying the collateral property to the lender as trustee, with a power of sale. (See guide What is a Mortgage / What is Foreclosure for a detailed explanation of the differences between a mortgage and deed of trust). Because of these documents, the lender already technically owns the property, so it needs to do very little to sell it. The exact details and time-frames vary from state to state. In all states, foreclosure occurs in the county where the property to be foreclosed upon is located.
While not absolutely required, generally the beginning of the process is marked by appoint of a Substitute Trustee. There are firms in non-judicial foreclosure states that specialize in handling foreclosures. Usually one of these firms is appointed as Substitute Trustee to handle the non-judicial foreclosure
Notice of Default
A Notice of Default is usually the first step in a non-judicial foreclosure. This is a statement advising the borrower that he or she is in jeopardy of having his or her property sold unless he or she brings the loan current by the date stated. In most states that utilize this procedure, the Notice of Default is also published in the newspaper and often it is required that it be posted on the property itself and it may be required that it also be sent directly to all interested parties of record. The length of time which must be given to the borrower to cure is determined by state law, typically 60 or 90 days.
Notice of Trustee's Sale
If the default is not cured as required by the terms of the Notice of Default, the lender then can proceed to issue a Notice of Trustee's Sale. Again, the time until sale can occur is set by state law, usually in the vicinity of 21 days. In California, the largest non-judicial state, the minimum time to the actual sale date from the Notice of Trustee's sale is 21 days, although it can be more. Again, all interested parties must get notice and public notice is generally required. The borrower can reinstate by paying the delinquency in full up to 5 days before the sale. There is normally no court involvement in a non-judicial foreclosure. If a borrower feels that there is something wrong or improper occurring, in order to raise these issues, he or she would have to file a lawsuit to try to obtain an injunction stopping the process.
As can been seen from the above steps, non-judicial foreclosure is a straightforward and quick process. The time-frames involved range. Using California as an example, the Notice of Default must provide for a ninety day redemption period. After that, the Notice of Sale must provide at least 21 days' notice. So, the minimum time-frame start to finish is approximately 111 days.
Many states provide a mechanism for a foreclosing Plaintiff to recover a deficiency judgment, usually consisting of the shortfall between the total owed by the borrower and the value of the property it recovers if it buys it at the foreclosure sale. In those states that permit this, a borrower is not done with the obligation simply because he she or it allows a foreclosure to be completed. It is very important to understand whether or not you may be exposed for a deficiency judgment before you decide whether to oppose foreclosure or to consider bankruptcy. For details of how deficiency judgments work in Florida, check here. While the guide is geared to Florida, the concept is similar in other states that permit it, although the details and time-frames vary. Some states do not allow deficiency judgments under some circumstances.