Know Your Rights in the Foreclosure Process

Facing foreclosure is an exhausting experience. The mortgage foreclosure process is long and complex, full of deadlines, confusing wording, and dire-sounding consequences. Foreclosure is governed by state law. And each state has its own foreclosure rules and procedures. While the details vary from state to state, some general rules apply. This article covers the different kinds of foreclosures, the main documents involved, the standard timeline, and what you can do to protect yourself if you’re facing foreclosure.

What's a Foreclosure?

While some people have the cash to buy a house outright, most people need to borrow money from a mortgage lender. Home loans are typically secured debts: The house serves as collateral for the loan. If a homeowner defaults on repayment, the lender can foreclose on the property to recoup its investment. Foreclosure is a legal process where the lender sells a property to the highest bidder.

What counts as a “default” to trigger foreclosure depends on the terms of your mortgage documents and your state’s foreclosure laws. For example, in some states, you can default by failing to pay property taxes. In other states, you aren’t in default unless you’ve missed a certain number of regular payments in a row.

Foreclosure is a last resort for lenders to get paid, and most would rather avoid it if possible. A foreclosure can be expensive for a mortgage company. The bank usually must pay a lawyer to handle the legal proceedings and the sale, plus an eviction action if the borrower won’t move out. The mortgage company is often the only bidder and ends up owning the foreclosed property. This means it becomes responsible for property maintenance, hazard insurance, and real estate taxes until it finds a buyer. The bank usually ends up selling the property at a loss. Also, the lender doesn’t receive any mortgage payments throughout the process.

Even if you’re in default, it’s usually much more profitable for your lender if you stay in the house and keep making payments. So even if you fall behind, don’t assume that foreclosure is inevitable. It’s usually in everyone’s best interest to communicate and work together to find a solution.

Mortgage vs. Deed of Trust vs. Promissory Note

There’s a lot of paperwork associated with a real estate closing, but two documents are particularly important. One is your promissory note. As its name implies, in the promissory note you promise to repay the mortgage company the money it loaned you. The promissory note is where you’ll find your interest rate, payment terms (how long you have to pay the debt), and information about late fees, escrow, and other charges.

The other key document is your security agreement. Depending on your state’s laws and your lender, your security agreement may be called a mortgage or a deed of trust. This document gives your mortgage company the right to sell the property if you don’t make your payments according to the terms of the promissory note. Your deed of trust or mortgage is filed as a public record, usually in your county’s land registry. 

Both a mortgage and a deed of trust can serve as a security agreement. Many people refer to their deed of trust as a mortgage, but they aren’t the same thing. Of the two, a mortgage is a bit more straightforward: It’s an agreement between you (the mortgagor) and the mortgage lender. It gives the lender the right to foreclose if you default on the promissory note. It also contains protections and safeguards for you and lists some of the rules the lender must follow if there’s a foreclosure.

A deed of trust, by contrast, is an agreement involving three parties: you (called the trustor), the lender (called the beneficiary), and the trustee. The trustee is usually a trust company, title insurance company, or attorney, depending on your state’s laws. 

Roughly half of U.S. states allow deeds of trust. In these states, when you buy a house, you don’t have full ownership rights until the property is fully paid for. A deed is a document that establishes ownership rights. The deed of trust gives the trustee limited ownership of your property until your mortgage debt is paid. The deed of trust also gives the trustee the right to sell the property to benefit the lender if you default.

Foreclosure Types

Another important difference between a mortgage and a deed of trust is the way foreclosure works under each. 

Mortgages & Judicial Foreclosures

If you have a mortgage, the mortgage gives your lender the right to foreclose if you default. In most cases, this means that your mortgage company must file a lawsuit against you in court. This is called a judicial foreclosure. You’re entitled to notice, and you can appear in court and raise defenses to the foreclosure. Your lender must present evidence that you’ve defaulted on the terms of your promissory note and prove they have the right to foreclose. 

If the mortgage company succeeds, the judge enters an order allowing the lender to sell your house. In a judicial foreclosure, if your house sells for less than you owe on your mortgage, the lender can usually get a judgment against you for the unpaid portion of the debt. This is called a deficiency judgment. The mortgage company can then use this judgment to garnish your paycheck or your bank account.

Deeds of Trust & Nonjudicial Foreclosures

If you have a deed of trust, on the other hand, it will contain a section called the power of sale clause. This clause allows the trustee to sell the property when the sale is in the lender’s best interest — for example, when the borrower isn’t paying the note. Because the trustee already has an ownership interest in the property, the trustee can sell the house without having to get a court order. This is called a nonjudicial foreclosure.

Judicial foreclosures are permitted in every state. All states that allow deeds of trust also allow nonjudicial foreclosure. Some states don’t use deeds of trust but do allow lenders to bypass the judicial foreclosure process by including a power of sale clause in the mortgage.

Nonjudicial foreclosures don’t require any court oversight. They’re generally much quicker and less expensive for the mortgage company. As a result, in states where nonjudicial sales are an option, lenders almost always prefer to take the nonjudicial route. Sometimes, though, there are exceptions. 

For example, if the sale doesn’t bring enough money to pay off your mortgage debt, a few states permit the lender to file a lawsuit against you for the remaining balance. But most states don’t allow lenders to seek a deficiency judgment after nonjudicial foreclosures. If the bank anticipates a large deficiency in a case, it may opt for a judicial foreclosure to preserve that right. A lender might also choose a judicial foreclosure if there are problems with the property’s title or other issues that need to be resolved by a judge.

How Foreclosure Works

Foreclosures are regulated by state laws. This means the process, required notices, response times, rules about sale dates, and reinstatement periods vary from state to state. Even so, the fundamental parts of the foreclosure process are somewhat universal.

Foreclosure Notices

Before moving forward with any foreclosure sale, the bank must send you some sort of official written notice. The exact timing and wording of the usual notices depend on your state’s laws and whether you’re facing a judicial or nonjudicial foreclosure. 

Notice of Default

One notice you might receive is a notice of default. This is a notice letting you know that you’ve missed enough payments or fallen far enough behind to officially be in default under the terms of your mortgage or deed of trust. 

Don’t confuse a notice of default with an ordinary missed payment notice! Banks generally send missed payment notices when you are two or more weeks late making your full mortgage payment. A missed payment notice often lets you know that your lender has charged you a late fee and/or reported the payment as late to the credit bureaus. After receiving a missed payment notice, you can usually contact the lender and work out an informal way to catch up on your payments.

A notice of default, on the other hand, is much more serious. Banks usually send a notice of default around 3-6 months after your first missed payment. This is typically the final warning your mortgage servicer sends before moving your loan into foreclosure status. The bank will likely publish or file this notice with your county land records office. Among other things, the notice contains: 

• The amount of your past-due balance,

• The date by which you must pay this amount (typically 30-90 days from the date of the notice), and

• The next step the servicer will take if you don’t pay the full balance by the stated deadline. Usually, the next step is foreclosure.

Notice of Acceleration

Another common pre-foreclosure notice to watch for is a demand letter containing a notice to accelerate. Most mortgages include a section called an acceleration clause. The acceleration clause says that if you default on your payments or break the terms of your agreement, the lender can “accelerate” your due date and require you to pay the entire loan balance within a set time (usually 30-60 days). If you weren’t already in default, failing to pay the accelerated balance will count as a default and will trigger the bank’s foreclosure right.

Notice of Sale

In a nonjudicial foreclosure, the next notice you receive after a notice of default or notice to accelerate could be a notice of sale. A notice of sale is usually filed with the county recorder and published in a newspaper or online. It contains the date on which the lender will sell your house. You have a very limited time to act after receiving a notice of sale.

Foreclosure Timeline

Generally, if you forget to pay your house note, the payment isn’t considered a “missed payment” until about 10-15 days have passed. This 10-15-day window is called a grace period. During the grace period, your lender usually won’t charge you a late fee and won’t report your payment as late to the credit bureaus. If you still haven’t paid by the end of the grace period, your lender may send you a notice of missed payment, charge you a fee, and report you as late. At this point, your loan is considered delinquent, but not yet in default. 

While the exact timeline for notices and foreclosure proceedings depends on your state and the type of mortgage, the federal Real Estate Settlement Procedures Act (RESPA) prohibits banks from starting a foreclosure until your loan has been delinquent for more than 120 days. For RESPA purposes, starting a foreclosure means filing the lawsuit in a judicial foreclosure or filing the notice of sale in a nonjudicial foreclosure. 

The 120 days is meant to give borrowers the chance to pursue any applicable loss mitigation options that could help them avoid foreclosure. Federal law also prevents mortgage companies from moving forward with foreclosure while a borrower is pursuing mitigation options or complying with an agreed repayment plan. As a result, the timeline often looks different for every borrower. For most people, the foreclosure process — from the first missed payment to the completed sale — can take as little as six months or as long as two or more years.

Public Auction

If you can’t pay your full accelerated loan balance after receiving a notice to accelerate, or you can’t catch up with the entire past-due amount by the deadline stated in a notice of default, your lender has the right to sell the property. There are a few exceptions, but a foreclosure sale usually must be open to the public, meaning that the lender must publicly advertise the sale and must accept bids from the public. In a judicial foreclosure, the sale is usually conducted by the local sheriff’s office. In a nonjudicial foreclosure, the trustee handles the sale.

Many people believe that a foreclosure auction is a chance to buy a house for next to nothing, but this isn’t often the case. State laws prohibit mortgage companies from selling properties at a price that’s unfairly below market value. Instead, at most foreclosure sales, the lender enters an opening bid that’s equal to the total mortgage balance, plus interest and fees. As a result, there usually aren’t many bidders interested in buying most foreclosure properties. If no one buys the house at the sale, the lender takes ownership, and the house becomes bank-owned property (sometimes called real-estate-owned property or REO). 

If you’re still living in the house on the sale date, state laws and the new owner will determine how much time you have before you need to move out. If the house is bank-owned property, you’ll likely be able to negotiate a later move-out date. On the other hand, if another party bought the property, you may need to leave right away.

How To Avoid Foreclosure

The best way to avoid losing your home through foreclosure is by not letting the situation reach that point. In other words, your best bet is to communicate with your lender and work something out as soon as a problem arises, far before a foreclosure sale is pending. That said, you still have options up to and sometimes after the sale date.

Short Sales

In some circumstances, you may be able to avoid foreclosure by selling the house in a short sale. A short sale is much like an ordinary home sale, except that the sales price is less than what you owe on your mortgage. Because of this, the lender must approve the sale. 

Why would a lender approve a sale that doesn’t fully pay what’s owed? First, taking a hit on the mortgage balance may be less costly than continuing with the foreclosure action, especially in a judicial foreclosure state. Second, some payment is often preferable to no payment. If the house becomes REO property after the foreclosure, it could be some time before it generates any income for the bank.

Right of Redemption

Another option for avoiding foreclosure is to redeem your mortgage. You have the right to redeem your mortgage before the sale by paying off what you owe. In some states, you can also redeem the mortgage even after the sale by paying the mortgage balance within the redemption period. Unfortunately, most people don’t have access to the cash necessary to redeem a mortgage.

Bankruptcy

Filing bankruptcy will also stop a pending foreclosure if you file the bankruptcy before the sale. In some cases, a bankruptcy can buy you time to negotiate a payment arrangement with your mortgage lender. Both bankruptcy and foreclosure lower your credit score, but bankruptcy prevents a deficiency judgment and wipes out your other debts, allowing you to walk away debt-free. Contact a bankruptcy attorney to discuss your options. If you qualify, Upsolve can help you file bankruptcy yourself at no cost.

Let's Summarize...

If you don’t make your mortgage payments, your lender can sell your house by foreclosing. Your mortgage (or deed of trust) and promissory note operate together to grant and define the lender’s foreclosure rights and obligations. Depending on these documents and your state’s laws, you could be subject to a judicial or nonjudicial foreclosure. In a judicial foreclosure, a judge orders the sale. A nonjudicial foreclosure happens with no court oversight. 

In either type of foreclosure, the property is sold at a public auction, and you’re entitled to receive notice beforehand. While it’s usually easier to work with your lender before the foreclosure process starts, you still have options even after foreclosure proceedings begin.