What Is the Process of a Nonjudicial Foreclosure?

A foreclosure action may result in the loss of a home. Some states permit a foreclosure to occur without a court order if certain conditions are met. This “automatic” foreclosure process is referred to as a nonjudicial foreclosure. The following will describe and explain the process of a nonjudicial foreclosure and will explore the differences between this process and the judicial foreclosure process. 

What Is a Foreclosure?

Lenders who provide home loans protect themselves by taking a secured interest in the home. They create this interest by using the home as collateral for the loan. A mortgage is a secured debt that gives a creditor an ongoing lien on the subject property, which secures payment of the debt. A lien is a security interest that secures a right to payment for the debt incurred by the borrower. 

Foreclosure is the mechanism that allows lenders to enforce a lien against real estate. If the borrower fails to make mortgage payments and defaults, the lender can foreclose, seize, sell the property at public auction, and apply the proceeds to satisfy the balance due on the home loan.    

A foreclosure action won’t be initiated after missing just one payment. The terms of your mortgage will define what constitutes a default. Under federal law, in most cases, a loan servicer must wait until a borrower is more than 120 days' delinquent before officially starting the foreclosure process. Whether or not you are the subject of a judicial or nonjudicial foreclosure, by law, which varies by state, you must be given some notice prior to the commencement of any foreclosure action, as well as notice of the pending foreclosure sale itself.

What Is the Difference Between Nonjudicial and Judicial Foreclosure?

While foreclosure laws vary by state, there are generally two types of foreclosure. Some states permit nonjudicial foreclosures, while others allow a choice between nonjudicial foreclosures and judicial foreclosures. Whereas nonjudicial foreclosures may proceed without a formal lawsuit, creditors must file a lawsuit before a judicial foreclosure action may move forward.

Judicial Foreclosure

Specific foreclosure procedures are required for a judicial foreclosure. A party utilizing the judicial foreclosure process must give a borrower a notice of default. Generally, it must also file a lawsuit in state court to foreclose as one of the initial conditions of the foreclosure process. Judicial foreclosures are typically long, extended affairs that may take up to two years if contested. As the foreclosure process moves forward toward the eventual foreclosure sale, other additional notices may be required under state law.

Judicial foreclosures make it more difficult for a lender to take someone’s home to satisfy its debt. For example, New York only allows judicial foreclosures in order to provide additional protection for homeowners. Thus, a lender cannot foreclose on a home without filing a lawsuit in court. New York state law also requires an additional 90-day foreclosure notice to be sent to defaulting homeowners before the foreclosure process may be initiated. 

Once those initial steps regarding notice of default are completed, the lender files a foreclosure complaint. Like any other lawsuit, you may respond by filing an answer and challenging the allegations in the complaint. If you do, the mortgage company will proceed with litigating the lawsuit. if you fail to respond to the complaint, the lender will receive a default judgment. Defending a foreclosure action requires an attorney, especially because of how much rests on the outcome of the lawsuit.

After obtaining any type of judgment, even a default judgment, the lender will seek a foreclosure auction, scheduled by the court. Most states require that the mortgage company advertise the foreclosure sale. At the foreclosure auction, the property will be sold to the highest bidder. The mortgage company, as well as third parties, may bid on the property, with either purchasing the property. The winning bidder receives a deed that transfers title to the property.

Some states provide parties who lose their homes at a foreclosure sale with a right of redemption. This right allows you to keep your house by paying the foreclosure sale price or becoming current on your mortgage despite the sale. The rules regarding this right and period of time to which it extends, i.e. known as a tolling period, vary from state to state. Redemption periods may also vary depending on whether the foreclosure is judicial or nonjudicial.

After a Judicial Foreclosure

When a home is sold at a foreclosure sale, the sale price rarely covers the entire amount owed on a mortgage loan. The difference between the foreclosure sale price and the mortgage debt is referred to as a “deficiency.” Most states allow lenders to recover this deficiency. So, depending on the state and the amount for which the home is sold, a mortgage company could pursue a deficiency balance on the mortgage.

For example, say that you owe $250,000 on your home, miss payments, default, and your lender forecloses on the home, selling the property for $200,000. Because the sale price is $50,000 less than the $200,000 loan balance, a $50,000 deficiency remains. A deficiency judgment would allow your lender to pursue payment for the remaining $50,000. The lender would also likely add legal fees and other foreclosure-related costs to the total deficiency balance.

Some states place restrictions on obtaining deficiency judgments that often make the option of simply forgiving the deficiency balance more attractive to mortgage companies. Note however, that any deficiency that is forgiven creates tax liability (reported on a 1099 form) as income derived from the forgiveness of a debt. This may necessitate a borrower consulting with an accountant to minimize or avoid tax liability.

If the homeowner has not vacated the premises after a foreclosure sale, some states require a traditional eviction process in landlord-tenant court. The new owner can request that the judge issue an order requiring the person to leave the premises immediately. Other states don’t require a judicial hearing before a homeowner who has been foreclosed upon can be evicted, so be sure to check your state’s laws carefully if you’re at risk of foreclosure and/or eviction. This way, you’ll better understand your rights and what to expect. 

Nonjudicial Foreclosure

Nonjudicial foreclosures are common throughout the United States although some states only permit judicial foreclosures. Other states allow lenders to choose between a judicial and nonjudicial process. Why would any mortgage lender go through the time and resource consuming process of filing a lawsuit when it can proceed with a nonjudicial foreclosure?

While a nonjudicial foreclosure doesn’t require a court order, the law in those states that permit nonjudicial foreclosures are strict in their requirements. It may therefore be to a lender’s advantage to simply file a formal lawsuit and proceed with a judicial foreclosure. When a nonjudicial foreclosure process is preferred, the right to a nonjudicial foreclosure is usually based on a power of sale provision as permitted by state law and outlined in the property’s deed of trust. The process is overseen by a foreclosure trustee.

A lender or mortgage servicer is generally required to allow the borrower to seek a loan modification and then must wait for 120 days before it can proceed with a nonjudicial foreclosure action. A breach letter, usually required under the mortgage contract, is sent once a borrower is 30 days behind on their obligations. This event starts the loss mitigation period. A lender or mortgage servicer filing a notice of default with the county recorder triggers a nonjudicial foreclosure. State law controls how much time you have from the date of filing to resolve the default before a foreclosure action may proceed.

Sale After Notice

if you fail to cure the default. the lender or mortgage servicer will file a notice of sale listing the date and time of the sale. This will be recorded with the county recorder, published in a newspaper, and mailed to the borrower. These notice provisions are extremely specific to state law and require borrowers to be especially aware of applicable procedures and requirements.

A nonjudicial sale does not vary significantly from a judicial foreclosure sale. Once the mortgage company complies with state law for providing notice of default and notice of sale, the property may then be scheduled for an auction in a public place. Like a judicial sale, the lender or a third party may purchase the property at the auction and acquire title to the property. Both eviction and deficiency issues are largely the same as in a judicial sale.

Nonjudicial Foreclosure State Specifics

Foreclosures may proceed non judicially in the following states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia (sometimes), Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico (sometimes), North Carolina, Oklahoma (unless the homeowner requests a judicial foreclosure), Oregon, Rhode Island, South Dakota (unless the homeowner requests a judicial foreclosure), Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming.

Arizona’s nonjudicial foreclosure process only requires setting the sale date at least 91 days after the trustee records the notice of sale in the county recorder’s office and submits it to the homeowner. Notably, some states such as South Dakota and Oklahoma honor the right to request a judicial foreclosure process, even though both states permit nonjudicial foreclosures. 

In Oklahoma, you can force a lender to foreclose judicially by taking specific steps at least 10 days before the date of the foreclosure sale. You must notify the foreclosing party by certified mail that the property to be sold is your homestead and that you elect judicial foreclosure, and record a copy of the notice in the county clerk’s office. If the mortgage contract doesn't contain a power of sale clause, or if you complete the steps described above, the lender must file a lawsuit to foreclose and cannot proceed non-judicially.

New Mexico allows nonjudicial foreclosures but they are rarely used. Some lenders and mortgage servicers will pursue a judicial foreclosure even when the state permits a nonjudicial process in order to obtain a deficiency judgment; some states, like Alaska, only permit lenders to recover deficiencies if they proceed through the courts.

Conclusion

Most states allow nonjudicial foreclosures, which permit states to proceed with foreclosure sales without first obtaining a court order. This process takes less time than a judicial foreclosure does. Because nonjudicial foreclosures are much faster and less complex, homeowners don’t have as much time to defend against these actions as they would in a judicial foreclosure scenario. As a result, homeowners must be aware of their rights and review the law of their states carefully to protect their homes.