If you fall far enough behind in your mortgage payments, you'll likely lose your home to a foreclosure. Foreclosure is the legal process that allows a lender, or the subsequent loan owner, to sell your property to satisfy the debt you owe. (To learn what to do—and what not do—if you’re facing a foreclosure, see Foreclosure Do's and Don'ts).
Read on to get an overview of the parties and terminology involved in a home loan transaction, find out the general steps in the foreclosure process, and learn about some defenses that might be available to you in a foreclosure.
The key parties involved in most home loan transactions and foreclosures are:
Buying a home normally involves a large amount of money so it’s common for a buyer to take out a loan, rather than pay the entire amount in cash. As part of a home loan transaction, a borrower typically signs two main documents: a promissory note and a mortgage (or deed of trust).
A promissory note is the document that contains a borrower’s promise to repay the amount borrowed.
A mortgage—or, in some states, a deed of trust—is the contract that gives the lender the right to foreclose if the borrower doesn’t make payments on the loan. When the lender records this document in the land records, it creates a lien on the home.
If you default on your loan by falling behind in payments or breaching the agreement in some other way, the servicer will probably refer the loan an attorney or trustee for foreclosure. Foreclosure works differently in each state, but the two basic types are judicial foreclosures and nonjudicial foreclosures.
In a judicial foreclosure, an attorney files a lawsuit on behalf of the lender or investor in court to foreclose the home. You’ll receive a copy of the complaint, sometimes called a petition, which starts the foreclosure. You then get a certain number of days, like 30, to respond to the lawsuit. If you don’t file an answer in court—or if you file a response, but the court decides the foreclosure should go ahead—the court will grant a judgment of foreclosure in favor of the foreclosing party and set a sale date. The foreclosure sale is typically an auction where the public, as well as the foreclosing party, may bid on the property. The highest bidder becomes the new owner of the home.
All states allow judicial foreclosures, but about half also permit nonjudicial ("power of sale") foreclosures. In a nonjudicial foreclosure, an attorney or trustee—again, on behalf of the lender or investor—completes certain out-of-court steps.
Typically, a nonjudicial foreclosure involves one or more of the following steps, depending on state law:
Depending on state laws, a borrower might get a combined notice of default and sale, just a notice of sale, or notice by publication in a newspaper and posting on the property or in a public place.
You own your home up until the foreclosure sale. So, you may legally stay in the property until this time. In addition, depending on state law, you might be able to stay in the home until the redemption period expires or until some other action, such as ratification of the sale, occurs.
Some states have laws giving a foreclosed homeowner the right to regain ownership of the home—called "redeeming" the property—after a foreclosure sale by reimbursing the buyer for the amount paid at the sale or by repaying the full amount of the mortgage debt.
Sometimes, a foreclosure sale doesn’t bring in enough money to fully repay the home loan. When this happens, the difference between the sale price and the amount owed is called a "deficiency." In some states, the foreclosing party can get a personal judgment called a "deficiency judgment" against the borrower for this amount.
Depending on state law and your individual circumstances, you might have a defense to a foreclosure. A few potential foreclosure defenses include:
While this article provides a general picture of how foreclosure works, laws vary from state to state. To get specific information about your state's foreclosure procedures and how they apply to your particular situation, consider talking to a local foreclosure attorney.