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.
Lenders and mortgage servicers. Chances are, the bank or other lender you got your mortgage from (the mortgage originator) quickly sold the mortgage to another entity, which in turn resold it, and so on. You are supposed to be notified of these transactions, but there is no requirement for plain English in these notices, and you may not know who really owns your mortgage or who is entitled to foreclose if you default.
Whether or not you know who your lender is, you’ve probably been dealing with a company termed a mortgage servicer. The servicer receives your payments and passes them on to whoever is entitled to receive them—perhaps an overseas bank or a trustee for a mortgage trust.
If you default on your payments but want to keep your house, your mortgage servicer will represent the lender in negotiations. If negotiations fail, the actual foreclosure proceeding will be started either by the lender itself or by a trustee authorized to foreclose (if the loan document was a deed of trust).
Read the law. All of these foreclosure issues are discussed here, and the laws of each state are summarized in our Summary of State Foreclosure Laws. Nonetheless, you may be curious to find out for yourself what the statutes actually say, word for word. It is my firm belief that reading the law will give you a better understanding than I can give you in my necessarily brief summaries. So if you have access to a law library or the Internet and some patience, I suggest you use the citations on your state’s page to look up the law for yourself. (Our article on looking up your state's foreclosure statutes provides help on finding your state’s laws online.)