Foreclosure Basics

Foreclosure is the legal process the mortgage holder uses to take the collateral for a promissory note in default. Basically there are two types of foreclosure - judicial and non judicial. Most states allow both types, but it's common practice for most states to use one method or the other.

Judicial Foreclosure

About half of the states use judicial foreclosure - a process in which the lender (mortgagee) sues the borrower (mortgagor) to get the property. "Like all lawsuits, it starts with a summons and complaint served upon the borrower and any other parties with inferior rights in the property ( all junior liens, including tenancies, are wiped out by the foreclosure)."

At that time, the borrower should file an answer to the lawsuit. If he/she does not, the lender gets a judgment by default. The court appoints a referee to compute the total amount due which would include interest and attorney's fees. Then the lender places a "notice of sale" ad in the newspaper for a period of four to six weeks. If the total amount due is not paid, the referee auctions the house to the public on the court house steps. The process can take anywhere from three months to twelve months.

If there is a sizable amount of equity in the property, the only bidder will be a representative of the lender. The lender does not actually come out of pocket to purchase the property even though he can bid up to the amount owed.

If the sale results in an insufficient amount, the lender may be entitled to a deficiency judgment against the borrower and anyone else who guaranteed the loan. A deficiency judgment against the borrower is not allowed in all the states.

Non - Judicial Foreclosure

Most states permit a lender to use what is commonly called a "power of sale" to foreclose. This procedure eliminates the need for a lawsuit. "Rather than a mortgage, the borrower ("grantor") gives a "deed of trust" to a trustee to hold for the lender ("beneficiary"). Upon default, the lender simply files a notice of default and a notice of sale, which is published in the newspaper." This process usually takes about 90 days. After the sale, the borrower usually has a right of redemption.

Strict Foreclosure

Strict foreclosure does not require a sale and is permitted by only a few states. After the proceeding has started, the borrower has a certain amount of time to pay the amount due. When the date has passed, title reverts to the lender.

Answer the Complaint

File an answer with the court to the lender's complaint; then a court date is scheduled and the judge will decide if the lender has the right to proceed with the foreclosure. The usual outcome of this hearing is that the foreclosure process continues.

Reinstating the Loan

Many states permit the borrower to pay the amount in arrears, plus interest and attorney's fees before the date of sale. This is called "curing" the loan.

Forbearance

An agreement between the lender and the borrower to repay the delinquent amount in a lump sum or installments over six months. The lender may decide to let the borrower pay a reduced monthly payment until the borrower can get back on his feet and pay the remaining past due amounts in one lump sum. The forbearance may be an oral agreement or a written contract between the lender and the borrower. Usually these agreements do not exceed twelve months.

Deed-in-Lieu

This is a voluntary transfer of title to the lender (giving the house back to the bank). This is a last resort to avoid the negative consequences of foreclosure. In return for voluntarily giving the house to the lender, the borrower is often, but not always, released of any personal responsibility for the mortgage. In order to qualify for a Deed-in-Lieu, most lenders require that there must not be a second mortgage or liens on the property. Owners who have equity should consider selling their property before voluntarily conveying their house to the lender.

A Deed-in-Lieu on a VA loan can affect any future ability to get another VA loan and other VA benefits. Contact the VA for more information.

Redemption Rights

"Some states give a borrower the right to "redeem" the amount owed and get the title to the property back after the sale". The redemption period changes from state to state. The owner, borrower, or guarantor on the note has the highest right of redemption. Then behind him are the junior lien holders ( they are in danger of being wiped out by the foreclosing senior lien holder)

Short Sale

The process by which a trained third party negotiates with the bank a decrease in the defaulted loan amount. If the negotiations are successful the bank sells the property to the third party. All this takes place with the permission of the borrower (seller).