Foreclosure Definition

What is Foreclosure?

By Editor ⋅ March 12, 2008 ⋅  Email this post ⋅  Print this post ⋅ Post a comment

Many people who are in Foreclosure don’t understand exactly what the process is.  Even if you do think you understand it, this chapter may teach you something new. (Note: Please understand this is a very general discussion and laws vary by state.  The purpose of this chapter is to give you an understanding of what is happening to you in this process, not to teach you every legal detail of the foreclosure process.)
You may not have realized what you were signing in that big stack of papers when you bought your house, but there were two main documents – a promissory note and a security instrument (either a mortgage or a deed of trust).  The promissory note says you promise to pay for the house, and spells out the terms such as sale price, interest rate, payment amount, when payments are due, etc.  The security instrument says you agree that if you don’t make your payments, they can sell your house to satisfy the debt.
Generally speaking, there are two types of foreclosure, judicial and non-judicial. It is much easier to foreclose in a non-judicial state, because as the term implies, no judge need get involved.  In a judicial state, the lender must file papers, wait for a hearing to be set, and then wait days or weeks for the hearing to be scheduled.  In a non-judicial state the foreclosure proceeds on a well-defined timetable, which is often much shorter in duration that a judicial foreclosure.  If you are in a non-judicial state, you need to act quickly!

Judicial Foreclosure
In judicial foreclosure states, the security instrument is usually a mortgage, which is an agreement between you and the lender.  If they foreclose, you both have to appear before a judge.  The judge will order the house sold at the Sheriff’s sale unless you convince him or her that you have a good reason for not making your payments, which is highly unlikely.
Generally speaking, foreclosure is slower and more difficult for the lender in judicial states, because to a certain degree they are at the mercy of the court system and scheduling. However, do not assume anything regarding how long the process will take – verify this with your local county clerk or other public official, or better yet, a local attorney.

Non-Judicial Foreclosure
In non-judicial foreclosure states, the security instrument is usually a deed of trust, which is an agreement between three parties – the trustor (or borrower, that’s you), the trustee (a third party the bank chooses to look after the lender’s interests, this is usually an attorney), and the beneficiary (the lender).  Foreclosure is much easier in non-judicial states due to the fact that no court hearing is required.  The trustee handles the entire process of the foreclosure including the actual sale.  In reality, you will often see a “substitute trustee” handling the case on the local level if the actual trustee is geographically distant from the courthouse where the sale is being held.  The actual trustee simply hires another, local law firm to handle the case for them. 

Redemption
In a handful of states, the homeowner can redeem the property even AFTER the foreclosure sale within a specified number of days, known as the redemption period.  To do so, specific legal procedures have to be followed, and you must pay all back payments, interest (usually 10% and up), penalties, legal fees, redemption fees, and for any improvements made to the home since the sale.  In some states, parties other than the homeowners have the opportunity to redeem the property once the homeowner’s opportunity has expired.  These may include persons who hold or have obtained junior liens such as mechanic’s liens, judgments, second or third mortgages, etc.  Redemption periods are more likely to exist in judicial foreclosure states. See Appendix One to determine if your state offers a redemption period.

Deficiency Judgements
If the foreclosure sale fails to generate sufficient funds to pay off the loan balance, then the lender may sue for a deficiency within a period of time after the foreclosure sale. A judge may find you still owe more money to the lender, and enter a judgment for that amount. The lender will then file the judgment as public record in your county.  Your ability to buy or sell other real estate will be impaired until the judgment is satisfied.

Sheriff’s Sale
In all cases there is some point at the end of the procedure that we will refer to as the Sheriff’s sale.  Whether it is simply the final stage of a well-defined process (in a non-judicial state), a court hearing where the judge orders the sale (in a judicial state), or some other tipping point, at some point there is a day when you lose ownership of the house and will be essentially evicted.  Our goal in this book is to never get to that day.