The Differences Between Judicial and Nonjudicial Foreclosures

Foreclosure can be stressful and frightening. Learning about the foreclosure process is often challenging because of the complicated and sometimes confusing terminology. There are also big differences in how foreclosure procedures work in each state. While some federal laws apply, most laws that govern foreclosures are decided by the state where the property is located. Some states have strict rules about the foreclosure process a mortgage lender must follow, while other states allow the lender to choose between different types of foreclosures. 

The two most common types of foreclosures are judicial and nonjudicial foreclosures. This article covers how each of these kinds of foreclosure works, the differences between the two, and how to defend yourself against each type.

What Is a Judicial Foreclosure?

Judicial foreclosures require a judge to sign a sale order. This means your mortgage company must file a lawsuit against you in court. The lawsuit is typically based on you not making payments as agreed. Like with all lawsuits, you’re entitled to notice, and you have an opportunity to file an answer and raise defenses. 

In most judicial foreclosure states, there will be a hearing or trial date. The mortgage servicer must present enough evidence to convince the judge that you owe the mortgage balance and that you haven’t kept your end of the payment agreement. If the lender is successful, the court will enter a judgment against you, along with an order of sale. In some states, this is all contained in one document. In other states, the creditor must first get a judgment, then get an order allowing them to foreclose on your house to pay — or satisfy — the judgment. 

All states allow judicial foreclosure. But some states have laws that provide a different, less complicated foreclosure procedure. These foreclosures are called nonjudicial foreclosures because they usually take place outside of the court system, without the need for a judgment or court order. Nonjudicial foreclosures are generally much faster and typically don’t allow the homeowners as many opportunities to defend against the sale. Not surprisingly, most mortgage companies prefer to use nonjudicial foreclosure proceedings in the states that allow it.

What Is a Nonjudicial Foreclosure?

In a nonjudicial foreclosure, the mortgage company doesn’t have to file a lawsuit, present evidence to a judge, or get a court order to sell your house. As a result, the nonjudicial foreclosure process is usually much faster and cheaper for the lender. Each state has its own laws that govern the nonjudicial foreclosure process. This process can look different in every state. Currently, 30 U.S. states allow nonjudicial foreclosures. Because nonjudicial foreclosure rules are created by state statutes, they’re sometimes called statutory foreclosures.

If you’re not sure whether your state allows nonjudicial foreclosures, one way to tell is to look at the closing documents you signed when you bought your house. If you have a deed of trust, your state likely allows nonjudicial sales. In many nonjudicial foreclosure states, borrowers have deeds of trust instead of mortgages. There are some key differences between a true mortgage and a deed of trust, but both documents essentially serve the same function: Both act as the security agreement that binds your home as collateral for the mortgage loan. 

The key here isn’t so much what the document is called, but whether it contains a section called a power of sale clause. A power of sale clause gives your mortgage servicer the right to bypass the judicial foreclosure laws and use a nonjudicial foreclosure instead. As its name implies, this clause gives the creditor the power to sell the home if the borrower defaults on the agreement.

Judicial vs. Nonjudicial Foreclosures 

The state you live in and the wording of your mortgage agreement will help you figure out which foreclosure process applies to you. Some states require all foreclosures to be court-ordered. Some states require judicial foreclosures except in certain circumstances. Some states allow nonjudicial foreclosures if that’s what is specified in the mortgage paperwork. 

Although judicial and nonjudicial foreclosures both produce the same result, the two types of sales operate very differently. While the key difference is court involvement, the kind of foreclosure you face can also affect issues such as deficiency judgments, notice requirements, and your opportunity to defend yourself. 

Deficiency Judgments

If your home is sold through foreclosure and the sale price isn’t enough to pay off your mortgage balance, the remaining debt is called a deficiency. State laws for mortgage deficiencies after a foreclosure sale vary.

If the sale was a judicial foreclosure, the mortgage company can usually file a motion asking the court to enter a judgment against you for the deficiency amount. Then, the creditor can enforce this deficiency judgment just like any other judgment — for example, by garnishing your wages. 

If the sale was a nonjudicial foreclosure, some states allow the mortgage company to file a lawsuit against you for the deficiency balance. Other states don’t allow deficiency judgments at all, allow them only in some circumstances, or limit the amount of a deficiency judgment that can be collected.

Some states don’t allow deficiency judgments unless the foreclosure was judicial. In these states, your lender might choose to use a judicial sale process, even if state law and your paperwork give the lender the option of nonjudicial foreclosure.

Federal Foreclosure Laws

Although foreclosures are primarily governed by state laws, lenders must also comply with federal protections, such as those in the Real Estate Settlement Procedures Act (RESPA). These federal rules are implemented by the Consumer Financial Protection Bureau (CFPB). For example, if you miss a mortgage payment, your lender must contact you within 36 days to discuss loss mitigation possibilities and must assign someone to help you navigate your mitigation options within 45 days. RESPA rules apply to both judicial and nonjudicial foreclosures.

Under another important federal rule, your lender can’t begin foreclosure until your mortgage is more than 120 days past due. For a judicial foreclosure, this means the servicer can’t file the foreclosure action in court until your loan is more than 120 days delinquent. For a nonjudicial foreclosure, this means the lender can’t publish or record the first notice of sale until the 120-day mark has passed.

The CFPB provides additional protections for consumers who attempt to take advantage of loss mitigation opportunities. For example, a bank can’t start a foreclosure against you, even if you’re more than 120 days late, if you have a pending mitigation or modification application. 

State Foreclosure Laws

State laws determine the procedure for judicial and nonjudicial foreclosures. The process for each kind of foreclosure is similar from state to state, though there are some differences. For example, in most states, anyone can purchase a property at a foreclosure sale, but in Connecticut, only the mortgage company (or another creditor with a lien on the property) may buy a house in a foreclosure sale. Also, states often have unique requirements and exceptions to the general sale process. Oklahoma, for instance, has a separate set of foreclosure rules that apply to property that’s mostly used for farming or agriculture.

State laws also cover various issues related to foreclosure sales, such as:

• Rules about vacating the property after the sale;

• Regulations about the notice of default and other notices your lender must send and when it must send them; and

• Rules concerning the right of redemption and applicable redemption period.

Foreclosure Defenses

In general, it’s much easier to defend yourself against a judicial foreclosure than a nonjudicial one. Judicial foreclosure processes are usually a lot longer than nonjudicial processes. In a judicial foreclosure, the lender must also provide you with notice of nearly every step, and you have a chance to respond to almost every notice.

A nonjudicial foreclosure happens much more quickly than a judicial sale, with fewer opportunities to stop the foreclosure. Even if you have a defense, in a nonjudicial situation, it can be difficult to know who to contact or how to raise your defense. 

Let’s Summarize…

If you default on the terms of your mortgage agreement, your lender may turn to foreclosure. Depending on your state’s laws and the terms of your mortgage, your lender may have the option to pursue a nonjudicial foreclosure or a judicial foreclosure. A judicial sale is the result of a lawsuit and a court order, while a nonjudicial sale takes place completely outside of a courtroom. 

While both procedures end in the same result, they aren’t identical. A nonjudicial foreclosure is typically much faster and much harder to defend against than a judicial foreclosure. The type of sale also affects other parts of the process, such as deficiency judgments, redemption rights, and eviction timelines.