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.
In Massachusetts, New Hampshire, and Rhode Island, an arcane procedure called foreclosure by possession lets the lender take possession of a house by “peaceful entry.” 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.
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 sometimes 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:
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):
|States Where Judicial Foreclosure Is Customary|
|Delaware||New Mexico (sometimes)|
|Indiana||Oklahoma (if the homeowner requests it)|
|Kentucky||South Dakota (if the homeowner requests it)|
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:
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 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 28 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 28 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. After the judgment, the property is appraised (because it can’t be sold for less than two-thirds of its appraised value at the foreclosure sale) and then notice of the date, time, and place of sale is published for three consecutive weeks in a newspaper of general circulation in the county where the property is located. The lender files the notice of sale with the court at least seven days prior to the sale and sends a copy to the judgment debtor, as well as the other parties to the action, but not those who failed to make an appearance in the case. Then, on the specified date, 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. â