"Foreclosure" happens when you fall behind on your mortgage payments, and the owner of your loan (called the "bank" in this article) uses state procedures to sell your house to repay the debt. Foreclosure works differently in different states.
In some states, the bank has to file a lawsuit to foreclose, called a "judicial foreclosure." In others, the bank can choose to foreclose without going to court, a "nonjudicial foreclosure."
In a judicial foreclosure, the bank must file a lawsuit to start the process. A judicial foreclosure typically takes several months or more, giving you time to look for another place to live and save money for the future.
Another advantage is that you can raise any legal defenses to the foreclosure in court without filing your own lawsuit.
With some exceptions, foreclosures go through court in the following states: Connecticut, Delaware, District of Columbia (nonjudicial also allowed), Florida, Hawaii (nonjudicial also allowed), Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana (executory proceeding), Maine, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma (nonjudicial foreclosures allowed, homeowner can request judicial foreclosure), Pennsylvania, South Carolina, South Dakota (nonjudicial foreclosures allowed, homeowner can request judicial foreclosure), Vermont, and Wisconsin.
Here's how a typical judicial foreclosure might proceed.
Under federal law, in most cases, the bank must wait until you're more than 120 days delinquent in payments before starting a foreclosure.
In many cases, as the loan contract requires, the bank sends 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.
If you don't make up the missed payments, the bank will go to court and file a lawsuit asking the court for the right to sell the home and apply the proceeds from the sale to the debt. If state law allows it, the complaint might also ask the court to grant a deficiency judgment if selling the property won't fully pay off the debt. (In some states and circumstances, a deficiency judgment is also allowed after a nonjudicial foreclosure.)
If the bank gets a deficiency judgment against you, you remain responsible for the outstanding balance left on the loan after the foreclosure sale. However, some states don't allow deficiency judgments under certain circumstances.
The bank delivers a summons and complaint to you (called "serving" you with a summons and complaint in legalese).
The summons and complaint give you a deadline by which you must respond if you choose to contest or argue the lawsuit, usually between 20 and 30 days. Whether you file a response is up to you.
If you don't respond, the bank will ask the court for a default judgment and automatically win the suit. The court then issues a default judgment authorizing the bank to sell your home.
If you respond to the suit, you'll have the opportunity to tell a judge why you think you have a legal right to keep your house and that foreclosure isn't warranted. The better your defenses, the longer the process will drag out in court. Even if you win, though, it might be a temporary victory if the bank can fix whatever problem caused it to lose this time.
If the court decides in favor of the bank, it will enter a judgment ordering the sale of your property to satisfy the debt.
At the sale, the bank will likely make a credit bid. If no one makes a higher bid on your home at the foreclosure sale, the bank gets the ownership of the property.
A few states give you some time after the foreclosure auction to redeem the property and recover ownership of the home by paying off the successful bidder or paying off the entire mortgage debt.
If you don't leave the property when your legal right to remain in the home ends, which depends on state law (perhaps after the sale, after the redemption period expires, or some other event happens, like confirmation of the sale), you'll receive an official notice to leave the property.
If you're facing a foreclosure and want to learn about potential defenses, 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 (free) HUD-approved housing counselor is also a good idea.