When to Pursue a Judicial Foreclosure?

Judicial foreclosure becomes necessary when a borrower has defaulted on a home loan but the lender does not yet have the legal authority to seize the property. In many cases, the loan documentation will give the lender explicit authority to foreclose; if it doesn't, the lender must go to court for permission. That's judicial foreclosure.

Mortgage vs. Deed of Trust

When you take out a home loan, you must promise to repay it. You make that promise in one of two documents: a mortgage note or a deed of trust. The key difference is that the deed of trust includes a "power of sale" clause, which essentially gives the lender permission to take back the property and sell it if you default on the loan. The mortgage note has no such clause, so the lender will have to get a judge to rule that you have violated the loan agreement.

Default

Your lender isn't going to foreclose immediately if you miss a payment. But if you miss several payments in a row, you can expect the lender to initiate foreclosure proceedings. According to the Department of Housing and Urban Development, lenders typically get the ball rolling on foreclosure three to six months after you stop making payments. The first step is a "demand letter," a formal notice from the lender telling you how far you are behind in your payments and giving you 30 days to get your payments up to date. Miss that deadline, and the next step depends on how the loan is secured. If the loan has a deed of trust, the lender can schedule an auction, at which your house will be sold. If there's a mortgage note, then the lender pursues judicial foreclosure.

Lawsuit

In judicial foreclosure, the lender sues you. You'll get a copy of the lawsuit, and you'll have to file a response -- called an "answer" -- within a fairly short time, usually a few weeks. If you don't respond, the judge will automatically rule for the lender, who can then schedule a sale. This is called a default judgment. Even if you do file an answer, the lender may still ask the judge for an automatic ruling in its favor. If the facts of the case aren't in dispute -- you didn't make your payments as you were supposed to -- the judge may issue such a ruling, called a summary judgment. Otherwise, the case goes to trial.

Geography

Whether a home loan will be backed by a mortgage note or a deed of trust -- and therefore whether the foreclosure will be judicial or non-judicial -- is up to both state law and local practice. All states allow judicial foreclosure, and about two-thirds allow non-judicial foreclosure. In many places that allow both kinds, deeds of trust are much more common, so non-judicial foreclosures predominate.

References

• Nolo; The Foreclosure Survival Guide - In or Out of Court?; Stephen Elias; 2009
• Department of Housing and Urban Development: Foreclosure Process
• Department of Housing and Urban Development: Foreclosure Timeline
• Bankrate.com; Foreclosure: Judicial or Nonjudicial?; Oct. 12, 2010
• Dane County (Wis.) Housing Authority; Responding to a Foreclosure Lawsuit; Legal Aid of Wisconsin; June 2009