Facts About the Step-by-Step Process in a Foreclosure
Each state exercises the authority to determine how foreclosures are processed for properties within its boundaries. Although specific terms of the process will differ state-by-state, the overall steps are the same throughout the country. Lenders must abide by state-specific guidelines, even if they are not headquartered in that state. Each step must be followed, or the lender may risk failing at the foreclosure.
Other People Are Reading
-
Loan Origination
-
Banks and mortgage companies lend money to qualified borrowers based on their credit history, income and the value of the property they wish to purchase. Before the loan can fund, the lender requires that the borrowers sign a series of important documents, the first of which is the promissory note. This document states the loan amount, interest rate, and term and that the borrowers are indebted to the lender until the loan is paid in full. By signing the note, the borrowers promise to repay the loan plus interest. Another document signed is called the security instrument. Depending on the state, this document will either be titled as a mortgage or a deed of trust. Both documents list the terms and conditions of the loan, the borrowers rights, and the lenders rights. A mortgage acts to place a lien on the property in favor of the lender until the loan is paid in full. The deed of trust places the property's title under the control of a qualified trustee, usually assigned by the lender. The property will come out of trust and in full ownership of the borrowers when the loan is paid in full. The security instrument provides the basic structure of how a foreclosure would proceed, if necessary, and provide the documentation the lender will need to move forward with a foreclosure.
Default
-
The lender will assign a payment schedule to the borrowers. Usually, payments are due once monthly. Missing a payment by a few days may not cause any more inconvenience than a late fee. However, missing a payment by 30 days or more will flag the borrowers account as in default. Once a loan is in default, the lender will monitor it. The lender can send notices to the borrowers, or call them concerning the matter. The terms of the number of times the borrower must be contacted about a default status varies by state. In most states, once the loan is 90 days past due and the lender has sent any required notifications to the borrower, the lender can begin the foreclosure process.
-
Nonjudicial vs. Judicial
-
Two types of foreclosure methods exist in the U.S.: judicial and nonjudicial. Usually states that use a mortgage as the security instrument require judicial foreclosures, while those states using the deed of trust use nonjudicial foreclosures. This is because a deed of trust can contain a power of sale clause. By signing the deed of trust, the borrowers agree to the clause stating that in the even they default on the loan, the trustee can sell the property to recoup the loss on the loan without a court order. Mortgages do not generally contain a clause to this effect, so a court order is required before the lender can sell the property. In judicial foreclosures, the lender must file a complaint, suit, or lis pendens with the court against the borrowers. The lender must state the amount requested in the foreclosure, which is usually the unpaid loan balance, plus interest, and legal fees. The borrowers can attempt to argue the foreclosure, or repay the lender to avoid loosing their home at auction. However, if no agreement is reached, the court can rule in favor of the lender and schedule an auction of the property. The nonjudicial method cuts out the court system. The trustee can directly sell the property at auction on behalf of the lender. The only stipulations to this method are state-specific guidelines, such as when the sale can occur, and how many times the borrower must be notified.
Auction Sale
-
When the property is scheduled for auction, the lender or trustee must advertise the sale in a public location, such as a newspaper and the courthouse. The borrowers must be notified of the sale date and time, and the amount requested, or the "starting bid." Usually, the borrowers can stop the auction at any time up until the sale date by reaching an agreement with the lender or repaying them in full. The auction sale is held by the county sheriff, judicial foreclosures, or the trustee, nonjudicial foreclosures. The highest bidder will win ownership rights to the property through a deed signed by the sheriff or the trustee. Some states offer a post-sale redemption period to the borrowers who lost their homes. The length of the redemption period varies by state. If the borrowers are able to repay the lender, the bidder looses ownership to the home. If the property does not sale at the auction, the bank will take ownership. These properties are called real estate owned, or REO, properties. The bank may try to sell the properties directly at a value price.
-
