Foreclosure - Legal Information
Understanding Foreclosure Terminology - Types and Definitions.
Legal process in foreclosures
Mortgage holder (lender) puts its collateral (borrower's house) for sale to collect its loan with accumulated interest from borrower.
Banks do not foreclose properties to make profit. They are not allowed to do so. They simply want to get their money back. That's it! They don't care if foreclosureproperty is sold at a lower-than-market price.
Lenders and government agencies that own foreclosed properties want to get rid of them fast. These vacant properties are subject to vandalism. Selling foreclosure homes at a lower price is better than selling them at a little higher price later. They leave the repairs to new owners.
Types of foreclosure
Basically, there two types of foreclosure:
(1) Judicial (in “mortgage” states)
- Lender initiates lawsuit against borrower (mortgagor) to get the property.
- Property is sold at auction. It goes to the highest bidder.
- Lender can bid. In most cases, property goes to lender. It becomes REO (Real Estate Owned).
- All junior (second, third, etc.) liens are wiped out after foreclosure.
Judicial process takes about 90 days to one year.
(2) Non judicial (in “deed-of-trust” states)
- No lawsuit. Trustee holds the deed-of-trust for the lender.
- Non judicial foreclosure process takes about 90 days.
Who becomes the owner in a foreclosure?
Junior obligation - Mortgage becomes the first claim on foreclosed property. All subsequent mortgages, liens and judgments are considered junior obligation. Tax liens may have a different status. Junior lien holders get their money only after mortgage money is paid off.
Deficiency judgment - Lender gets this document when sales proceeds of foreclosure property do not exceed loan plus accrued interest amount.
Foreclosure procedure: How does it work?
If homeowner cannot find a buyer during preforeclosure (pre-auction) stage for preforeclosure short sale, then foreclosure becomes unavoidable. Here’s how the foreclosure process starts:
- Homeowner defaults, loan becomes delinquent.
- Lender's attorney orders a title search to determine if there are other lien holders or judgments against the foreclosed property.
- Attorney files a "Foreclosure Complaint" with the clerk of the county court.
- Attorney files lis pendens with the court to make it known to the general public that the foreclosure process has begun.
- Attorney notifies Sheriff to serve the owner and other lien/judgment holders with summons and complaint.
- Homeowner has a certain period of time to respond.
- If homeowner of foreclosure home does not contest, then, an affidavit (a judgment) is filed against him/her.
- Superior court validates the affidavit.
- Attorney applies for Final Judgment papers and Writ of Execution.
- Attorney sends Writ of Execution to Sheriff.
- Sheriff advertises the foreclosure sale in the newspaper.
- New owner demands that old homeowner vacate the premises in 30 days.
- If property is not vacated in 30 days, eviction process starts.
Are you in mortgage or deed of trust state?
One important legal issue to check: Every state has a different rule on right of redemption (buy-back) granted to those whose properties are foreclosed.
Most states use mortgages that give the borrower (foreclosure property owner) foreclosure redemption right. Right of redemption entitles the seller to reclaim his/her property after the sale is concluded. There is a statutory time limit to exercise this right. The previous owner gets the title when he/she brings the loan current by paying all accumulated installment payments plus late payment penalties.
Lenders have a stronger position in deed of trust states. Lenders keep the deed of trust as collateral for their loans. Lenders can initiate judicial foreclosure procedures by requesting sale of the property.
Check the foreclosure law and foreclosure practices in your state, and take the necessary precautionary measures where needed.