The Nuts and Bolts of Foreclosure

Get the basics on how the foreclosure process works, foreclosure terminology, and whether you're on the hook for a "deficiency" afterwards.

Before you can decide what to do about your foreclosure, you need to get  a general picture of how foreclosures work in your state. You might feel like skipping this  step and getting on with deciding what to do—get right with your lender, fight the foreclosure, or walk away with the help of a short sale, deed in lieu of foreclosure, or the bankruptcy court. But you can’t make smart decisions without some knowledge of how a foreclosure proceeds.

At the very least, you need to know what’s coming if foreclosure looms. Here are the big issues:

  • How much time you’ll have before your house is sold. If you know that your house can be sold at auction in just 30 days after you first get notice of the foreclosure, you’ll need to act differently than if you can count on three or four months in which to negotiate with the lender or try other strategies. Fortunately, even in short-notice states, you can pretty much count on learning about the intended sale in time to do something about it.
  • Whether or not your foreclosure will go through court. In fewer than half the states, foreclosures go through court; in the others, your house can be sold without a judge’s approval. If you know that you won’t lose your house unless a judge gives an official go-ahead, your strategy will likely be different than if your foreclosure will be proceeding without judicial oversight, because court foreclosures usually take longer than nonjudicial ones.
  • Whether you’ll be liable for a “deficiency judgment if the foreclosure goes through. If the house sells for less than you owe on it, in many states the lender can sue you for at least some of the difference. Homestead laws (state laws that protect your home equity from creditors) don’t help you, because mortgage debt has priority over any homestead rights your state’s law provides. One reason many people file for bankruptcy when faced with foreclosure is that bankruptcy eliminates liability for deficiencies.

Getting a Grip on Foreclosure Terminology

Here are a few terms you may run into. As with any system, getting the words right is half the battle.

Mortgages and deeds of trust. When you got a loan to buy your house, you agreed that the loan would be secured by the house. That meant that if you defaulted on your payments, the owner of the loan could foreclose—that is, take ownership of the house and evict you. Security agreements such as these are filed (recorded) in the local land records office. In some states this security agreement is termed a mortgage, while in others it’s called a deed of trust. With a few exceptions, mortgages can only be foreclosed in court, while deeds of trust can be foreclosed without going through court.

First, second, and third mortgages. The first loan you took out to buy your home is called the first mortgage. If you also borrowed a lesser amount for the down payment, or if you later took out a loan against your equity, this later loan is called a second mortgage. And finally, if you took out a third loan or arranged a line of credit to be secured by your home, you have a third mortgage. â

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