In some states, the foreclosing party—like a bank—can choose to foreclose without going to court. This process is called a nonjudicial foreclosure. In other states, though, the bank has to file a lawsuit to foreclose. This process is called a judicial foreclosure.
Read on to learn how a typical nonjudicial foreclosure might proceed.
When Jason and Emilia bought their home for $600,000, it seemed like a great deal, but now it’s worth only about $500,000—less than they owe on their loan. Jason and Emilia live in California, where nonjudicial foreclosures are the norm. Like most Californians, Jason and Emilia signed a promissory note and a deed of trust when they bought their home. (Read about the difference between a promissory note and deed of trust.)
The deed of trust authorizes the bank to “accelerate” the entire loan (declare the full loan amount due immediately) and states that the trustee (the third party that handles nonjudicial foreclosures in California and some other states) can sell the property at a public auction if Jason and Emilia default on their monthly payments or breach the terms of the deed of trust in some other way.
Under federal law, in most cases, a foreclosure can’t begin until the borrowers are over 120 days’ delinquent. (To learn about federal laws that protect homeowners during foreclosure, see Federal Laws Protecting Homeowners: Foreclosure Protections.)
Before accelerating the loan, the terms of the deed of trust require the bank to send the homeowners a breach letter, which states that they can avoid a foreclosure altogether by paying the missed payments plus costs and fees. So, after Jason and Emilia miss four loan payments, the bank sends them a written notice—called a breach letter—that foreclosure proceedings won’t start for 30 days and that the proceedings can be avoided if they get current on the loan. Also, as required by California law, the loan servicer contacts Jason and Emilia to discuss working out a foreclosure alternative, like a loan modification. The servicer suggests that Jason and Emilia send in a loss mitigation (foreclosure alternative) application to find out if they qualify for any other options. (Learn about special foreclosure protections in California.)
But Jason and Emilia decide to let the home go because they have no equity in the house and can’t afford the payments. They let the 30 days given in the breach letter expire without reinstating and don't submit an application to their loan servicer for an alternative to foreclosure.
After Jason and Emilia are more than 120 days behind on payments, they get (by mail) a notice of default. It gives them three months to cure the default by making up the missed payments, plus interest and costs. Again, Jason and Emilia decide not to pay. After the three months pass, they get a notice of sale, telling them that the property will be sold at an auction on the courthouse steps at a specific time. In California, the sale has to be least 20 days after the end of the three-month cure period. (Read more about California foreclosure laws and procedures.)
At the auction, the bank buys the home using a credit bid when no one else makes a bid on the property. (A “credit bid” is when the bank, instead of paying cash at the sale, gets a credit in the amount the borrower owes.)
Because the bank doesn’t take immediate action to have Jason and Emilia evicted after the foreclosure sale, they continue living at the property payment-free for a few weeks. Eventually, the bank follows California eviction laws for taking possession from former homeowners after a foreclosure sale and serves Jason and Emilia with a three-day notice to quit.
Although Jason and Emilia could stay until the bank goes to court and gets an eviction order, they decide to move out to avoid having the eviction on their credit record. An eviction is a matter of public record and could hurt Jason and Emilia’s ability to rent or lease a new place to live after the foreclosure. They’ll already have bad credit as a result of the foreclosure, and many landlords subscribe to private databases that screen prospective tenants for being the subject of previous eviction lawsuits.
Foreclosure laws and procedures vary widely from state to state, especially when it comes to nonjudicial foreclosures. For an estimate of the timeline in your area and in your particular situation—and to learn exactly what steps will take place in your foreclosure—talk to a local foreclosure attorney.