Foreclosures take one of two major paths: judicial (in court) or nonjudicial (out of court). If your home loan is secured by a mortgage, chances are excellent you’ll have a judicial foreclosure. If your loan is secured by a deed of trust, you’ll probably have a nonjudicial foreclosure. The real estate industry in a particular state—and the laws that industry’s lobbyists have pushed through the state legislature—pretty much determine whether mortgages or deeds of trust are used there.
A judicial foreclosure often takes longer—a lot longer—than a nonjudicial one. A judicial foreclosure also gives you a ready-made opportunity to oppose the foreclosure and assures that your home won’t be lost to foreclosure unless a judge signs off on it. Judicial oversight is an important protection against illegal tactics by the foreclosing party.
Foreclosure by Possession
In Maine, Massachusetts, New Hampshire, and Rhode Island, an arcane procedure called foreclosure by possession lets the lender take possession of a house by “peaceful entry.” Except for Maine (which provides for judicial foreclosure), these states allow nonjudicial foreclosure, too. Because of legal uncertainties regarding title and what constitutes peaceful entry, these laws are not used very often, if ever. If you live in one of these states, you should ask a HUD-approved housing counselor (see our article on using a HUD-approved housing counselor) whether this method of foreclosure is used in your area. Also check your state’s page in our Summary of State Foreclosure Laws.
Do You Have a Mortgage or a Deed of Trust?
As you’ll see, it isn’t always clear what the foreclosure process will be. Even in a state that typically requires foreclosures to go through court, nonjudicial foreclosure is permitted if the loan is secured by a deed of trust rather than by a mortgage. On the other hand, even if a first mortgage is foreclosed nonjudicially in a particular state, home equity lines of credit (HELOCs) and home equity loans typically must be foreclosed judicially (usually under the state’s enforcement of judgments act). That’s because these types of loans often aren’t secured by a mortgage or deed of trust but rather by a security agreement, legally a different sort of animal that can only be enforced in court.
Not sure which document was used to secure your home loan? You can find out by:
- reviewing your original paperwork (that pile of documents you got when you closed escrow on your house)
- calling your mortgage servicer (the company to whom you make your payments)
- asking a counselor at a local HUD-approved housing counseling agency (more about these great sources of help can be found in our article on using a HUD-approved housing counselor) how foreclosures generally proceed where you live, or
- visiting your local land records office and pulling up the recorded document (under your name or address) on the public-access computer.
In some states, the borrower has a right to request a judicial foreclosure even if a deed of trust authorizes a nonjudicial foreclosure. See your state’s page in our Summary of State Foreclosure Laws for more information on whether you’ve got this option.
If you live in one of the states listed in the table below, and your home loan is secured by a mortgage, the foreclosure will probably take place in court.
In judicial foreclosures, your lender gets things started by filing a foreclosure lawsuit in the local court. You will receive official notice of the lawsuit when a sheriff or process server personally serves you with (or posts on your door in some cases):
- a summons explaining your right to file a written response to the lawsuit and telling you how long you have to do so, and
- a copy of the document (called a petition or complaint) that requests the foreclosure and that sets out the reasons why the judge should issue a foreclosure order.
|States Where Judicial Foreclosure Is Customary|
|Arizona (sometimes)||New Jersey|
|Connecticut||New Mexico (sometimes)|
|Illinois||Oklahoma (if the homeowner requests it)|
|Kansas||South Dakota (if the homeowner requests it)|
|Louisiana||West Virginia (sometimes)|
You can contest the foreclosure or let it proceed. If you do respond, the court will set a date for a hearing, at which you and the lender will present your evidence and arguments. After the hearing, the judge will either:
- order the foreclosure to go ahead (and in many states, set the sale date)
- postpone a final decision to give the lender more time to fill in a missing gap (proof of ownership, for example), or
- dismiss the case, sending the lender back to the drawing board.
In two states, Connecticut and Vermont, a judge who approves the foreclosure can order ownership (title) to be transferred then and there. This is called a strict foreclosure.
Judicial foreclosures are seldom if ever permanently derailed, but they can be significantly delayed. If you have grounds to fight the foreclosure, either because the foreclosing party can’t prove its case or because you offer proof that casts doubt on the foreclosure’s legality, such as evidence that you were not behind on your payments after all, it can take many months before the case is resolved one way or the other.
Eventually, if the foreclosure is legally appropriate, the judge authorizes your house to be sold at auction or, in the strict foreclosure states, transferred directly to the lender.
Here’s how a typical judicial foreclosure might proceed:
Peter and Mary bought their house two years ago at the then-reasonable price of $400,000. They made a 10% down payment and borrowed the other $360,000. The house now has a market value of just $325,000. Peter was laid off from his $60,000-a-year job and now earns $10 an hour. He and Mary can no longer afford their payments.
They live in Ohio, a judicial foreclosure state. Once they miss three payments, the lender sends them a written notice that foreclosure proceedings won’t start for 30 days and that Peter and Mary should contact them for a possible workout. After 30 days have passed, and Peter and Mary haven’t responded, the lender sends them a ten-day notice of intent to begin foreclosure proceedings. The notice tells them that the proceedings can be avoided if they make up the missed payments plus costs and interest. Peter and Mary decide to let the foreclosure happen, given that they have no equity in the house, they won’t be able to make the payments (even if modified downward), and the prospects for future appreciation of the property are bleak.
Two weeks later, Peter and Mary are served with a copy of a summons and foreclosure complaint that the lender has filed in the local court. They have 30 days to respond. They visit a lawyer, who tells them they may be able to put off the foreclosure sale by filing a response contesting the allegations in the complaint and demanding a trial. Unfortunately, the lawyer wants too much money. Peter and Mary could do some research into possible defenses and represent themselves, but they decide they really can’t afford the house any longer and will have to move anyway. They let the 30 days go by without responding.
The court issues a default judgment (that’s what happens when you don’t respond to a suit filed against you) that authorizes sale of the property. Shortly after that judgment, the foreclosing party sends Peter and Mary a copy of an official ten-day notice of intent to sell the property. The notice also informs Peter and Mary that they can avoid the sale if they redeem the mortgage by paying it off in full, plus foreclosure costs and attorney fees of $2,500. Peter and Mary ignore the offer, and ten days later the property is put up for sale at auction. But because no buyer comes forward to pay the asking price, ownership goes to the lender.
The entire process, from the time Peter and Mary got the first notice from the lender until the auction, takes about three and a half months. Had Peter and Mary contested the foreclosure and made the foreclosing party prove it owned the loan (an increasingly common defense), the process might have dragged on for many more months.
Even though Peter and Mary lose ownership of their home, they don’t have to move out right away. The lender may just let the house sit, waiting for the market to improve. In the meantime, there is no law preventing Peter and Mary from remaining in the home payment free until they receive an official, written eviction notice. In fact, they are doing their neighbors, and the lender, a favor by maintaining the property through their occupancy.
If your loan is secured by a deed of trust—as is the custom in the states listed below—the foreclosure will probably be nonjudicial. This means a court will not oversee the procedure (except in a few states, where a judge signs off of the foreclosure). If, however, your loan is secured by a mortgage, the foreclosure will likely be judicial. See your state’s page for information about your possible right to choose a judicial foreclosure.
|States Where Nonjudicial Foreclosure Is Customary|
|Arizona (sometimes)||New Mexico (sometimes)|
|California||Oklahoma (unless homeowner requests judicial|
|District of Columbia||Rhode Island|
|Georgia||South Dakota (unless homeowner requests judicial)|
|Missouri||West Virginia (sometimes)|
If your property is in one of these states, you most likely signed two core documents when you bought or refinanced it: a promissory note and a deed of trust. The deed of trust (when it was recorded in your county’s land records office) turned the promissory note into a debt secured by a lien (legal claim) on your home. The deed of trust also authorized the entity named as trustee in the deed of trust to foreclose on the property if you ever defaulted. The deed of trust typically allows the foreclosure to proceed outside of court, under state law.
Your state’s law sets out the specifics of the foreclosure procedure, including how much notice you get, how the property will be sold (typically at a public auction), and what rights (if any) you have to reinstate the loan before the foreclosure date or recover title to the property after it’s sold.
Time may be short. You have to be on your toes when a foreclosure looms in a nonjudicial state. That’s because you have very little notice of the foreclosure sale, and once it happens you may be permanently out of luck.
Here’s how a typical nonjudicial foreclosure might proceed.
When Jason and Emilia bought their home for $400,000 two years ago, it seemed like a great deal—but now it’s worth only about $350,000, less than they owe on their loan. Jason and Emilia live in California, where nonjudicial foreclosures are the norm. Like most California homebuyers, they signed a promissory note and a deed of trust when they bought.
The deed of trust authorizes the trustee (a California title insurance company) to “accelerate” the entire loan (declare the whole enchilada due immediately) and sell the property at a public auction if Jason and Emilia default on their monthly payments or fail to maintain the insurance and pay property taxes. However, California law requires the lender to first give the homeowner some time to get current on the loan—this is called reinstating the loan by making up the missed payments plus costs and interest.
After they miss three payments, Jason and Emilia receive (by certified mail) a 30-day notice requesting that they meet with the lender to discuss a possible solution to their mortgage issues. They decide to punt and avoid responding. A short time later, they receive (also by certified mail) a notice of default. It gives them 90 days to reinstate the mortgage by making up the missed payments plus interest and costs. (In most nonjudicial foreclosure states, the notice of default gives homeowners from 15 to 90 days; a few provide up to 120 days, and a few provide only notice by publication.) Jason and Emilia don’t have the cash to make up the payments, and they are unable to work out a repayment plan with their lender. After the 90 days pass, they receive another document: a 20-day notice of intent to sell the property at an auction on the courthouse steps at a specific time.
At the auction, no one meets the minimum bid, and the property ends up with the lender. Because the lender doesn’t take immediate action to have Jason and Emilia evicted, they continue living there payment free for another six months, until the house is sold to a new owner who wants to take possession. The new owner first tries to negotiate a move-out date with Jason and Emilia, but that doesn’t work. So the owner follows the California eviction laws for taking possession from former homeowners, and serves Jason and Emilia with a 3-day “notice to quit.”
Although Jason and Emilia are legally entitled to stay until the new owner goes to court and gets an eviction order (about a two-month process), they decide to move out to avoid having the eviction case on their credit record. Even so, Jason and Emilia have remained in their home for one year without making a payment, and have managed to save most of the money they would have paid for shelter during that period—which will make it easier for them to move out and find a new place to live.