How Nonjudicial Foreclosures Work

In a nonjudicial foreclosure, the lender—or subsequent loan owner—doesn't have to go to court in order to foreclose on your home. This means that the foreclosure typically proceeds more quickly than a judicial foreclosure, which goes through court. (Learn the do's and don'ts when you're in foreclosure.)

Read on to get details about how nonjudicial foreclosures work, and whether your foreclosure is likely to take place out of court.

Nonjudicial Foreclosures: No Court Involvement

If you're facing a nonjudicial foreclosure, you most likely signed two core documents when you bought or refinanced your home: a promissory note and a deed of trust (or similar document).

Deeds of trust: Creating a security interest in the home. The deed of trust turns the promissory note into a debt secured by a lien (legal claim) on your home, and authorizes the lender to foreclose on the property if you default by not making the payments or violating the loan contract in some other way. The deed of trust also typically allows the foreclosure to proceed outside of court, under state law. (Learn more about the difference between a promissory note and a deed of trust.)

States where nonjudicial foreclosures are the norm. Foreclosures are usually nonjudicial in the following states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia (sometimes), Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico (sometimes), North Carolina, Oklahoma (unless the homeowner requests a judicial foreclosure), Oregon, Rhode Island, South Dakota (unless the homeowner requests a judicial foreclosure), Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming.

The Nonjudicial Foreclosure Process: Different From State to State

State law sets out the specifics of a nonjudicial 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 (redeem the home) after it's sold.

You get behind in your payments. Under federal law, in most cases, the servicer must wait until you are more than 120 days delinquent in payments before starting a foreclosure.

You'll often get a letter notifying you of the lender's intent to begin foreclosure. In many cases, as required by the loan contract, the lender sends a letter—a "breach" letter—informing you that a foreclosure will begin unless you make up the missed payments, plus costs and interest. The letter may be sent during the 120-day preforeclosure period.

Nonjudicial foreclosure notices. Depending on what state law requires, you might get:

• a notice of default that gives you time to reinstate your loan by making up all the back payments, followed by a notice of sale (if you haven’t reinstated your mortgage by the deadline)
• a combined notice of default and sale stating that the property will be sold on a certain date unless you make up the missed payments
• only one notice—a notice of sale announcing that the property will be sold on a certain date unless you pay off the loan, or
• in a couple of states, notice only by publication and posting.

Right to reinstate. State law often provides a right to reinstate the loan by getting caught up on what you owe, plus fees and costs by a certain deadline prior to the sale. The deed of trust might also provide a certain amount of time to reinstate before a foreclosure sale. With some exceptions, however, once the sale occurs, your house is gone.

The auction is held. If you don't reinstate the loan, the home will be sold at auction. As with judicial foreclosures, the property often goes to the lender (or subsequent owner of the loan) when no one else bids on the property. The property is then known as "Real Estate Owned" (REO).

Right to redeem. A few states give you some time after the foreclosure auction to redeem the property (to recover ownership of the property by paying off the successful bidder or paying off the full loan debt).

You leave voluntarily or get evicted. If you don't leave the property when your legal right to remain in the home ends, which depends on state law, you'll receive an official, written notice to leave the property. (Learn more about eviction after foreclosure.)

Deficiency judgment. The lender might—if allowed by state law—later file a suit against you to get a deficiency judgment if selling the property didn't fully pay off the debt. If granted, you remain responsible for the outstanding balance left on the loan after the foreclosure sale. Some states don't allow deficiency judgments under certain circumstances.

(To get an idea about how a typical nonjudicial foreclosure might proceed, see Typical Nonjudicial Foreclosure: Example.)

Challenging a Nonjudicial Foreclosure in Court

Because you don't have the opportunity to raise defenses to the foreclosure in court as part of a nonjudicial foreclosure, if you wish to contest the foreclosure, you will have to file a lawsuit yourself. When you do this, you ask the court to temporarily stop the foreclosure so that you can resolve the legal issues in court. Once you are in court, you can raise the same defenses you would have raised in a judicial foreclosure proceeding.

In this kind of lawsuit, you typically ask the court for three things, in the following order:

• a temporary restraining order
• a preliminary injunction (which, in foreclosure actions, will last until the court decides the case), and
• a permanent injunction (which will be issued if the judge decides in your favor).

(To learn more, read How to Fight a Foreclosure in Court: Nonjudicial Foreclosure.)

Getting Help

If you're facing a foreclosure and want to learn about potential defenses that you could raise in court, whether you're likely to face a deficiency judgment, or how to avoid a foreclosure by working out an alternative, like a loan modification, consider talking to a foreclosure attorney.

Contacting a HUD-approved housing counselor is also a good idea. (Learn more about the benefits of talking to a HUD-approved housing counselor.)