You may be familiar with the term “foreclosure”, but you might not know what nonjudicial foreclosure really means. Don’t worry - this guide will help you understand your rights and options.
Foreclosure is the legal process of forcing the sale of real estate when a borrower defaults on their mortgage loan. In some states, the contract with the lienholder is a deed of trust rather than a mortgage agreement. Both spell out the agreement between the purchaser and lender, including the lienholder’s right to sell the property if the buyer defaults.
There are two types of foreclosure. In some states, the lender has to go to court to foreclose on real property. But, most states allow for “nonjudicial foreclosure.” This means the lienholder can have the property sold at a public auction without appearing in court.
nonjudicial foreclosure is great for lenders because the process is quicker and cheaper. But, it can be bad for homeowners. No one is watching if a lender cuts corners or does something shady. If your property is located in a nonjudicial foreclosure state, it’s important to understand how the process works and how you can protect your property rights.
(1) The Lender May Be Required To Send a Notice of Default and a Notice of Sale
The type of notice required depends on your state’s foreclosure laws. It also depends on the terms of your contract with the mortgage lender. In some states, pre-foreclosure notice is a two-step process.
First, the borrower receives a notice of default. The notice of default generally sets a deadline for catching up on past-due payments, plus late fees, and certain other costs. The notice might also warn the homeowner that the real property will be sold if those payments aren’t received by the deadline in the notice. If the borrower misses that deadline and hasn’t come to some other agreement with the lender, the second step is a notice of sale.
In other states, the nonjudicial foreclosure process is more abbreviated. In the abbreviated process, the homeowner may only receive a single, combined notice of default and sale. When the time for repayment is up, the lender sends a second notice, but may simultaneously request that the trustee schedule the property for sale.
These notices can be intimidating. But, it’s important to know that this is just the first step in the foreclosure process. You might still be able to avoid foreclosure even after receiving such notice.
(2) Loss Mitigation Required Under Federal Law
Federal Regulation X is one of the most powerful protections available to homeowners facing foreclosure. This regulation requires loan servicers to work with homeowners to attempt to resolve delinquencies without foreclosure. The servicer isn’t required to offer any particular solution. But, they are required to communicate with the borrower and give notice of certain rights.
First, the servicer must try to contact the borrower to discuss the situation within 36 days after a missed payment. The servicer also must tell the borrower about programs and solutions that might be available. For example, the servicer may explain how to apply for a mortgage loan modification. Or, they may explore other options, such as a short sale.
In a short sale, the lender agrees to the sale of the property for less than the outstanding loan balance. It won’t save the house. But, it can save the borrower money by avoiding the foreclosure process and the possibility of a deficiency judgment.
The initial contact requirement is just the first step. Within 45 days of delinquency, a servicer must send written notice of any loss mitigation options available. And, a lender can’t start foreclosure proceedings—judicial or nonjudicial—until a mortgage loan is at least 120 days delinquent.
(3) The Period for Publication Before a Foreclosure Sale
The timeline, from the start of foreclosure proceedings to the auction of affected real estate, is different from state to state. In some states, the process can move very quickly. For instance, in Texas, the initial notice allows a borrower just 20 days to get out of default. If that doesn’t happen, the lender can request that the public trustee schedule the property for sale.
The trustee sends out and posts a notice that the property will be offered for sale at auction on the first Tuesday after 21 days have passed since the notice of default and sale was mailed. That means that in Texas, the entire foreclosure process can be completed in less than 45 days.
Notice requirements vary as well. In many states, a notice must be published in a newspaper of “general circulation” in the county where the property is located. Other forms of notice may also be required. For instance, in many states, a notice must be posted on the door of the residence being foreclosed upon. Notices may also be posted at the courthouse or another public place.
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(4) The Auction
Like timelines and notice requirements, foreclosure auction procedures vary by state. Traditionally, foreclosure auctions have often been held on the courthouse steps of the county where the property is located. Recently, though, some states are moving toward online auctions.
Often, the lender will make the opening bid in the amount of the outstanding debt. This is known as a credit bid, because the lender “pays” for the purchase with credit for the amount owed. The highest bidder takes the property, whether that’s the lienholder or someone else. But, in some states, the borrower still has a chance to reclaim the real estate after it has been sold.
(5) The Right Of Redemption
Depending on state law, the foreclosure sale may not be the end of the road. Many states offer homeowners a “right of redemption.” This means the borrower can get the house back by paying the mortgage loan balance and any costs of the foreclosure.
The redemption period varies from state to state. In California, a borrower who has lost a home to foreclosure has a full year to pay off the debt and reclaim the property. Depending on factors like income, credit scores, the amount due, and the value of the property, the homeowner may even be able to take out a new loan to redeem the property.
(6) An Eviction
You might imagine that after a foreclosure sale, the borrower would have to leave the foreclosed property immediately. But, that’s usually not true.
Of course, the former owner might choose to leave the property after the foreclosure sale. They could also choose to leave earlier than that. If they don’t leave voluntarily, the buyer will typically have to formally evict them. They can’t simply put the previous owner’s belongings out on the street and change the locks.
The process varies depending on state law. It generally starts with serving notice on the occupant. The notice demands that they leave the property. The notice includes a deadline, and in some states it can be quite short. For example, California law allows the occupant just three business days to move out. But, that’s just the first step.
If the occupant doesn’t leave by the deadline, the new owner will generally have to file an eviction proceeding in court. The occupant will have a chance to appear in court before an eviction order is entered. This allows time to negotiate with the buyer, or to ask the judge for more time to move out.
Once an order of eviction is entered, the occupant’s belongings can be removed from the premises by the county sheriff or—in some states—a private company hired by the owner. This is generally a bad outcome. It can result in damage to or loss of personal property. Because of this, it’s best to make arrangements to leave the property by the date specified on the court order.
(7) Deficiency Lawsuits
Losing your home to foreclosure is a difficult experience. You’d like to believe that, when the process is completed and you have left the property, you will be free to put the foreclosure behind you and move on. But, it doesn’t always work that way. In many states, the lender has a right to sue the former homeowner for any unpaid balance.
Imagine, for example, that the debt on a house and the costs of sale added up to $150,000. But, the house only sold at auction for $120,000. The lender is still out $30,000—the difference between what was owed and what was received through the sale. This is called a deficiency balance.
There are some restrictions regarding when and how a lender can pursue a judgment for a deficiency balance. Specifics differ from state to state. For example, a few states only allow deficiency lawsuits after a judicial foreclosure.
The Role of the Courts
“Nonjudicial” means that the foreclosure takes place outside the court system. The court has no role in a nonjudicial proceeding unless the homeowner sues to stop the foreclosure. This means there is little oversight of the process, making it all the more important for homeowners to know their rights.
In a nonjudicial foreclosure, a foreclosure trustee is appointed to oversee the process. Depending on the state, this may be a public trustee or a private trustee. A private trustee is typically chosen by the lender. Though the trustee is neutral in theory, many are partial to the lender. That’s especially true when the trustee is a private appointee who may work regularly with the lender’s attorney. There is very little protection from conflicts of interest in the process.
The nonjudicial foreclosure process is simpler for lenders, as it involves less oversight than judicial foreclosure. So, it’s critical that homeowners facing nonjudicial foreclosure understand the process and their rights. At every stage, there may be opportunities to negotiate, avoid foreclosure, delay move-out, redeem the property, and otherwise protect your interests.