The Mortgage Foreclosure Process: What to Expect

Foreclosure Laws Differ Among States

Foreclosure laws vary from state to state. All states allow foreclosures by judicial sale, and some even require judicial foreclosures. These judicial foreclosure states necessitate court supervision for the property sale after the borrower defaults. Many states allow the lender to foreclose without legal action. These statutory nonjudicial foreclosures are sometimes called foreclosure by advertisement, power by sale foreclosures, or trustee sales. In either judicial or nonjudicial foreclosures, an official sells the property at an auction after the mortgagee meets the procedural requirements. A limited number of states allow "strict foreclosures". A court calculates the amount the borrower owes and gives the borrower a deadline to pay that amount. If the borrower does not pay by the deadline, the mortgagor gets the property without an auction.

Figure 1: Types of Foreclosure Procedures by State and Estimated Timeframe from First Missed Payment to Lender Receiving Title to Property

Source of data:“MGIC FlexClaim Simplified State Time Frames”

Acceleration of the Mortgage Debt

Despite the differences among the processes, most foreclosures follow a basic outline. First, the lender must give you written notice of any defaults, and some time to cure them. This notice is a prerequisite to the next step, which is acceleration. Accelerating the debt is calling the note due and demanding payment of the entire balance. You pay your mortgage in installments. If the lender did not accelerate the debt, it would be difficult for the mortgage holder to recover more than any payments that were due by the foreclosure date. Acceleration permits the lender to declare the whole balance due and demand payment. Your note and mortgage will spell out the conditions under which the mortgagor can accelerate the debt and foreclose. The mortgagor must comply with those requirements.

Judicial Foreclosure or Power of Sale

After the lender gives notice and accelerates the debt, the lender will take the legal steps required to recover the property. The best time to try to work something out with the lender is when the notice of default arrives, or even before that occurs. That is why it is important to open and read all of the notices and letters the lender sends. If you ignore them, you miss out on an opportunity to avoid foreclosure.

If the lender is proceeding under a power of sale, the mortgage holder is usually required to post a notice, often at the property site, and advertise the sale. In a judicial foreclosure, the lender files a lawsuit and must serve the borrower with a summons and complaint. After the lender serves the complaint, the borrower has a time period in which to respond to the complaint, but with very limited available defenses. You cannot avoid foreclosure by explaining to the court why you were unable to make your payments. The only real defenses are that you really did pay, or that the debt is invalid. At this point, the matter is in the hands of an attorney, and you will need to contact the lawyer to work out a settlement.

Foreclosure Auction

In almost all types of foreclosures, the next step is to schedule the auction. The sheriff or court official usually conducts the auction. In most cases, the lender bids on the property and acquires title for itself. If the sale price is less than the mortgage balance, the difference is called a deficiency. The lender can sometimes get a judgment against the borrower for the deficiency, but rarely makes the attempt.

The Redemption Period

Some states have a redemption period during which the borrower can regain title to the property by paying the purchase price plus costs and interest to the person who acquired the property at the auction. In states with redemption rights, you have some additional time to try to reach a repayment arrangement with your lender.

When to Leave the Property

Generally, you can stay on the property until the court orders you to leave. This usually requires a separate lawsuit against the borrower. These cases are often filed in the same courts that handle evictions. While you can hold out until the sheriff comes to set you out, it’s a better idea to move sooner. The new owner of the property can usually recover court costs and attorney fees against you. In addition, you will have short notice to find a place to stay, and if the sheriff sets you out, you and your belongings will literally be in the street.

Always consider consulting a lawyer in a foreclosure situation.