A foreclosure in any given state generally takes one of two paths: judicial (through the court system) or nonjudicial (out of court). In some states, foreclosures are exclusively judicial. In others, the lender can proceed using either a judicial or nonjudicial process. In these states, lenders usually select the nonjudicial process because it's faster and cheaper than foreclosing through court.
Sometimes, however, a lender in a state where foreclosures are ordinarily nonjudicial might elect to foreclose through the courts instead.
All states allow a lender to foreclose judicially, but certain states require this process for residential properties.
In states with a judicial foreclosure process, the lender must file a lawsuit to foreclose. The court will attempt to determine the circumstances surrounding the default through in-court hearings and documents that the lender, and sometimes the homeowner, file.
If the court determines that the foreclosure is proper and the homeowner doesn't qualify for a loss mitigation option to stop the process, the court will enter a judgment against the homeowner. A foreclosure sale will follow.
The court system usually isn't involved in states that permit a nonjudicial foreclosure process. However, some states require minimal judicial involvement.
A trustee typically handles a nonjudicial foreclosure. The lender designates the trustee in the deed of trust that the borrower signs when buying the home. But more often than not, the lender substitutes a different trustee later on to handle the foreclosure.
Nonjudicial foreclosure procedures differ widely from state to state.
In some states, the trustee gives the homeowner a notice of default. This notice informs the homeowner that the trustee intends to foreclose on the home. The homeowner is then given time to get current on the loan or negotiate a way to prevent a foreclosure.
The trustee might also have to send a notice with details about the sale.
Depending on state law, the lender might:
If the homeowner can't cure the default or otherwise find a way to avoid foreclosure, the trustee sells the home at a foreclosure sale.
The nonjudicial foreclosure process is generally quicker and less expensive (for the lender) than the judicial process, often lasting just a few months or less.
A lender that otherwise could go forward with a nonjudicial foreclosure under state law might choose to foreclose through the courts in any of the following situations.
After you sign a mortgage or deed of trust, the lender records it in the land records to establish lien priority. Priority determines who gets paid first from the proceeds after a foreclosure sale.
But if the mortgage or deed of trust isn't recorded, the lender will likely have to foreclose judicially to establish its priority.
Similarly, if the land records aren't clear about which lien has priority (say a first mortgage was inadvertently recorded after a second mortgage), the lender might file a lawsuit to foreclose. The court will then determine the correct priority.
If the mortgage or deed of trust contains an incorrect legal description for the home, the lender usually files a lawsuit so a court can ensure that the correct property is being foreclosed.
If the property's boundaries changed after the deed of trust or mortgage was recorded, the lender might file a lawsuit so a court can clear up the matter.
If the lender accidentally released or reconveyed the mortgage or deed of trust (say, the loan wasn't actually paid off), it will have to foreclose through the courts. (Generally, a lender files a document called a "release" or "reconveyance" in the land records after the borrower pays off the loan to clear the lien off the official record.)
If the lender forgot to include a junior lienholder in the nonjudicial foreclosure, it might have to file a suit to eliminate that lien.
In some places, like Hawaii and the District of Columbia, changes in the nonjudicial foreclosure laws (specifically, a law requiring the lender to offer foreclosure mediation to borrowers) drives lenders to opt for the judicial process.
That way, the lender can avoid the mediation requirements under the state's nonjudicial foreclosure laws.
If you're behind in your mortgage payments and want to find out if an upcoming foreclosure is likely to be judicial or nonjudicial in your situation, talk to an attorney. You should also consider contacting a lawyer if you've already received notice that the lender has started a foreclosure and you want to learn about potential defenses or get specific information about foreclosure laws in your state.
If you want to learn more about different alternatives to foreclosure, including loan modifications, short sales, and deeds in lieu of foreclosure, make an appointment to talk with a HUD-approved housing counselor.
Also, be aware that states sometimes have different laws and procedures if the property being foreclosed is a commercial property, multifamily home, timeshare, or undeveloped land rather than a single-family residence.