mortgage is a secured debt, which means the home acts as collateral for the mortgage loan. When you fail to pay your mortgage, the mortgage lender can take the collateral to satisfy the debts owed through a process called foreclosure. The process by which the bank forecloses on a home differs from state to state, but there are two common methods of foreclosure: judicial and non-judicial.
Judicial foreclosure requires the lender to get a judgment of foreclosure in a court of law. States that use the judicial foreclosure process exclusively include Connecticut, Delaware, Florida, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Nebraska, New Jersey, New Mexico, New York, Tennessee, Utah and West Virginia.
When a lender uses the judicial foreclosure process, there are several steps to foreclosing on a home:
- The homeowner falls behind on payments. Typically, a lender will not begin foreclosure proceedings until the homeowner is approximately two to three months delinquent. In some cases, this period may be shorter and in others longer.
- The lender will send an acceleration letter to the homeowner. This letter lets you know the lender wishes to terminate the loan and mandates you pay the full amount due on the mortgage.
- The lender will initiate foreclosure by filing lis pendens (suit pending notice) with the court. The homeowner will be served notice of the complaint and a summons.
- The homeowner will have a set period of time- usually around 30 days- to answer the complaint. The homeowner can raise defenses against foreclosure at this time
- The lender will need to prove to the court that the debt is owed and the court will compute the amount owed by the homeowner.
- The lender will make a motion to the court for a judgment of foreclosure.
- The lender must provide notice of the foreclosure sale. Usually, this means printing advertisements in the newspaper and posting a notice at the court and/or at the property.
- An auction is held to sell the property. The lender may bid on the property and the amount owed will be considered a credit if the lender buys the property.
- The home will be sold either to the lender or to a third party. Any money in excess of the amount owed to the lender will paid to the homeowner.
During this process, the homeowner may have a right of redemption or various other ways to stop the foreclosure, depending on state law.
Non-judicial foreclosure is permitted in other states either as the exclusive remedy for lenders, such as in Michigan and Tennessee, or as an elective option. Non-judicial foreclosure is authorized by a “power of sale” clause in the mortgage documents giving a lender the right to foreclose through a notice process without involving the courts.
The non-judicial foreclosure process is a multi-step process that, like judicial foreclosure, begins when a homeowner is in default. The process includes:
- A notice of default. The notice of default is typically published in the newspaper, posted at the property and recorded with the county. The notice specifies a period of time in which the homeowner must react either by paying the balance owed or by raising defenses. This notice is sent by a third party trustee who manages the foreclosure process and who has a responsibility to both lender and homeowner to act fairly.
- If the homeowner does not respond or correct the default, the date for a foreclosure auction will be set.
- There are specific time lines and requirements for publishing notice of the auction in the paper. For instance, notice of the pending sale may need to be published for six consecutive weeks.
- The foreclosure auction will be held. Many states have specific dates on which auctions are held, such as the first Tuesday of each month.
Like in judicial foreclosure states, homeowners are typically given many opportunities throughout the non-judicial foreclosure process to redeem the loan or otherwise stop the proceedings.