Foreclosure

What is a Foreclosure?

A foreclosure occurs when a bank or other secured creditor sells or repossesses a home or property after the owner has failed to comply with an agreement between the lender and the borrower. This agreement is called a mortgage or deed of trust. Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. Once the foreclosure is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs. If the promissory note was made with a recourse clause and if the sale does not bring enough to pay the existing balance of principal and fees the lender can file a claim for a deficiency judgment.

Types of Foreclosures

There are three main types of foreclosures which differ by court involvement or the value of the home.

The first type of foreclosure is a Foreclosure by judicial sale, more commonly known as judicial foreclosure, which is available in every state and required in many. Under this type of foreclosure, the sale of the mortgaged property is supervised by the court. The proceeds must first be used to satisfy the mortgage; then other lien holders; and, finally, the borrower if any proceeds are left. With this system, the lender initiates foreclosure by filing a lawsuit against the borrower. As with all other legal actions, all parties must be notified of the foreclosure, but notification requirements vary significantly from state to state. A judicial decision is announced after the exchange of pleadings at a hearing in a state or local court. In some rare instances, foreclosures are filed in federal courts.

The second type of foreclosure is a Foreclosure by power of sale, also known as nonjudicial foreclosure, and is authorized by many states if a power of sale clause is included in the mortgage or if a deed of trust was used, instead of an actual mortgage. In certain states, such as California, most so-called mortgages are actually deeds of trust. This type of foreclosure involves the sale of the property by the mortgage holder without court supervision. This is generally significantly faster and cheaper than foreclosure by judicial sale. As in judicial sale, the mortgage holder and other lien holders are respectively first and second claimants to the proceeds from the sale.

The last main type of foreclosure is a strict foreclosure which is available in a few states including Connecticut, New Hampshire and Vermont. Under this process, a suit is brought to the borrower by the lender ordering the lender to pay back the mortgage in a certain amount of time. If the borrower fails to do so, the lender gains the title to the property. This is generally only used when the value of the property is less than the debt.

Buying a Foreclosure

Once a property has been foreclosed upon; the next step is for the lender to sell the property. This can prove to be very beneficial for buyers, as the lender, usually the bank, does not wish to hold onto the property and very low prices are common. However, there are some added things to consider when buying one of these properties. This information can be viewed on our Buying a Foreclosure page.