If you stop making your mortgage payments, you will likely lose your home to foreclosure. Foreclosure is the legal process that allows the owner of your home loan to sell your home to satisfy the debt that you owe. Read on to get an overview of the general steps in foreclosure, what happens to any deficiency (the difference between the foreclosure sale price and the amount you owe) after a foreclosure sale, and what defenses might be available to you in a foreclosure.
Understanding Mortgage Transactions
Purchasing real estate usually involves a large sum of money and it is uncommon for a buyer to pay the entire purchase price in cash. Instead, a purchaser typically makes a down payment in cash and arranges for a loan to cover the balance of the purchase price.
Financing the loan involves two legal instruments: a promissory note and a mortgage (or deed of trust).
A promissory note is the document that contains your unconditional promise to repay the amount you borrowed (an IOU). The note creates a debt for which you are personally liable, meaning you are responsible to pay the balance that is due and owing on the note.
An endorsement transfers ownership of the note. Promissory notes are transferrable. When a loan changes hands, the promissory note is endorsed (signed over) to the new owner of the loan.
Mortgages and Deeds of Trust
A mortgage (or deed of trust in some states) is a legal document that pledges a piece of real property as security for the debt created by a promissory note. This document creates a lien on the property when it is recorded in the land records. (Learn more about the difference between a mortgage and a promissory note.)
An assignment transfers ownership of the mortgage/deed of trust. When a loan is transferred from one party to another, that transfer must be documented and recorded in the land records. The document used to transfer a mortgage or deed of trust is called an assignment. (Learn more about the difference between the difference between an assignment and an endorsement.)
Understanding the Players in a Foreclosure
The main players involved in residential mortgage loan transactions and foreclosures are:
The borrower. The borrower is the individual (the homeowner) who borrows money and pledges the home as security to the lender for the loan.
The lender. The lender gives the loan to the borrower.
The investor. An investor buys loans from lenders.
The servicer. The servicer (the company you make your monthly payment to) manages the loan account on behalf of the lender or investor. Loan servicers, among other things, collect and process loan payments and pursue foreclosure when the borrower stops making payments.
What Is a Foreclosure?
If you fall behind in payments (called "default"), a foreclosure is the procedure by which the lender or investor forces the sale of your property so that it can get repaid for the debt.
General Steps in a Foreclosure
Foreclosure works differently in different states. There are two types of foreclosure: judicial and nonjudicial.
- Judicial foreclosure. Judicial foreclosure requires the lender to go through the court system to take back ownership of the property.
- Nonjudicial foreclosure. In a nonjudicial foreclosure, the lender follows a state-specific foreclosure process, but there is no court supervision.
Each state typically uses one or the other of these procedures. With a few exceptions, mortgages can only be foreclosed in court, while deeds of trust can be foreclosed without going through court.
With both judicial and nonjudicial foreclosures, the foreclosing party must typically mail you a notice telling you that foreclosure proceedings will start if you don’t get caught up in payments. The notice generally provides 30 days for you to pay the past-due amounts otherwise the foreclosure will begin.
In addition, some states offer homeowners preforeclosure mediation or other ways to help the homeowner avoid foreclosure. (Learn more in Nolo’s State Foreclosure Mediation Programs area.)
In a judicial foreclosure, the foreclosing party starts the foreclosure by filing a lawsuit in state court as a plaintiff. You’ll receive a copy of the complaint (sometimes called a petition) to foreclose and get a certain number of days to respond to the lawsuit (for example, 30 days). If you don’t respond to the lawsuit, the court will grant a judgment of foreclosure in favor of the plaintiff and set a sale date.
Generally, the foreclosing party must publish notice of the foreclosure sale in a local newspaper for a certain number of weeks before the sale and provide you with a copy of the notice. The foreclosure sale is a public auction where the public (and the foreclosing party) may bid on the property. The highest bidder becomes the new owner. (Learn more about How Judicial Foreclosure Works.)
In a nonjudicial (or "power of sale") foreclosure, the foreclosing party must typically take one or more of the following steps (depending on the state requirements):
- mail you a notice of default that tells you how much time you have to reinstate (get caught up on payments)
- record the notice of default in the local land records office, and
- mail you a notice of sale that tells you the date the property will be sold. (Depending on your state’s laws, you might get a combined notice of default and sale, a notice of sale, or notice by publication in a newspaper and posting on the property.)
Each of the notices have time limits and specific content requirements. For instance, a notice might have to describe the property, the amount due, the amount necessary to reinstate the loan (including costs and interest), and information on the person you can contact to discuss the notice.
As with a judicial foreclosure, the property is sold at an auction where the public (and the foreclosing party) may bid on the property. (Learn more about How Nonjudicial Foreclosure Works.)
Right to Redeem
In some states, you get a certain amount of time to regain title to the property after a foreclosure sale by paying the foreclosure purchaser the sale price plus accrued interest and other expenses. This is called the right of redemption. (To find out if your state provides a redemption period, go to our Summary of State Foreclosure Laws page and click on your state.)
What Happens After the Foreclosure Sale
You own your home up until the foreclosure sale. This means you may legally stay there until this time. In addition, in some states, you can stay in the home until the redemption period expires or until some other action, such as ratification of the sale, occurs.
In most cases, if you don’t leave the home at this point, the purchaser at the foreclosure sale who is the new owner of the home (often the foreclosing party), will take steps to evict you. In some states, the new owner of the home must file a lawsuit in court to evict you. In others, the eviction will be initiated as part of the foreclosure action.
In some states and under certain circumstances, the new owner of the home must send you a notice prior to the eviction, giving you a certain amount of time to vacate the property. Generally, it is best to leave the property before this time period expires, prior to the formal eviction action. (Learn more about eviction in Nolo’s Foreclosure Timeline: After You Get Notice to Leave article.)
In some foreclosure sales, the property does not sell for an amount sufficient to cover the total debt. If this happens, the difference between the sale price and the amount owed is called a deficiency.
Example. Say you owe your mortgage lender $200,000, but your home only sells for $150,000 at the foreclosure sale. The deficiency is $50,000. (Some states limit the deficiency to the difference between the property’s fair market value and the total debt. In this example, if the home’s fair market value was $175,000, the deficiency would be limited to $25,000.)
Whether your lender can get a deficiency judgment (a personal judgment against you for the amount of the deficiency) depends on the state law where you live. (Learn more about deficiency judgments.)
Defenses to Foreclosure
Depending on the circumstances in your situation, you may have a defense to a foreclosure. Some common defenses to foreclosure include:
- the foreclosing party can’t prove it owns the debt
- you are on active duty in the military and entitled to protection from foreclosure under the SCRA
- the foreclosing party didn’t follow state foreclosure procedures, and
- the servicer made a serious mistake. (To learn about these and other defenses to foreclosure, visit Nolo's Defenses to Foreclosure area.)
How to Raise Your Foreclosure Defense
How you raise a defense depends on whether your foreclosure is judicial or nonjudicial.
Judicial foreclosures. In a judicial foreclosure, you will have the opportunity to raise defenses in an answer to the foreclosure complaint. (To learn more, read our article How to Fight a Foreclosure in Court: Judicial Foreclosure.)
Nonjudicial foreclosures. Since there is no court hearing or other opportunity for you to raise defenses in a nonjudicial foreclosure, you'll need to file your own lawsuit to bring up any defenses. (To learn more, read our article How to Fight a Foreclosure in Court: Nonjudicial Foreclosure.)
Learn More About Foreclosure in Your State
This article provides a general picture of how foreclosure works. To find specific articles about your state's foreclosure procedures, mediation programs, programs providing assistance to struggling homeowners, ant-deficiency laws, and more, visit Nolo’s State Foreclosure Law Center area.