When it comes to home foreclosures, most homeowners think of the process in static terms. The reality is that there are different types of foreclosures, and you should be familiar with their implications for you as a homeowner/borrower. In this article, we address the key distinctions between judicial and non-judicial foreclosure.
Judicial foreclosure states include Connecticut, Delaware, Florida, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina and Wisconsin.
Some states permit both judicial and non-judicial foreclosure processes. In judicial foreclosure states, borrowers sign both a note (or bond)—which serves as evidence of the borrower’s promise to pay back the debt—and the mortgage itself, which creates the lien on the property as security for the debt.
Under a judicial foreclosure, upon a borrower’s default on their mortgage loan, a state court can grant the borrower what is known as the "equitable right of redemption" if the borrower repays the mortgage in full. If you, as a borrower, fall behind on your mortgage payments in a judicial foreclosure state, the lender, through its legal counsel, can initiate judicial foreclosure against you by filing a lawsuit. Should final judgment be entered in the mortgage provider’s favor, the property is subject to auction.
The judicial foreclosure process proceeds through the following phases:
- Date of Default. This is the date that a borrower is considered to have defaulted under the mortgage contract.
- Filing of Lawsuit. When the lender files suit through its attorney, the lender files a complaint in state court (or, occasionally, federal court) to seek foreclosure as a remedy for non-payment by the borrower.
- Your Response. The time that you have to respond to the lender’s lawsuit will vary by state. If you fail to respond to the notices within the statutory time limit, the lender’s attorney will submit a report to the court requesting that the court appoint a referee. If a referee is appointed, the referee will review the facts and circumstances in the foreclosure action and render a report to the court. If you file a response disputing material facts in the case, the court will conduct a trial to determine if foreclosure should occur. An attorney can advise as to whether or not you may also have legal grounds—i.e. grounds that speak strictly to the legality of the foreclosure, without speaking directly to the underlying facts—to dispute the attempted foreclosure.
- Court Approval. If the court approves the lender’s request for foreclosure, the judge will issue a Judgment of Foreclosure and Sale in favor of the foreclosing lender. This will allow the property to be sold in foreclosure.
- Eviction. The date that you, as a borrower, can be evicted after entry of judgment, if you do not leave the property voluntarily, will vary by state.
- Transfer Date. This is the date that the foreclosure sale itself is completed by transferring the title on the property from the home occupant to the lender or to the highest bidder on the property at the foreclosure sale.
- Marketing and Sale. After the title has been transferred, the lender, if it obtained the title to the property on the transfer date, will market and sell the property for resale to a future owner-occupant or, in some instances, to investor(s).
Non-judicial foreclosure jurisdictions include Alabama, California, Colorado, the District of Columbia, Georgia, Hawaii, Idaho, Massachusetts, Mississippi, Missouri, Montana, Nevada, New Hampshire, North Carolina, Oregon, Tennessee, Texas, Virginia, Washington, West Virginia and Wyoming.
The principal difference between a judicial foreclosure and a non-judicial foreclosure lies in the identity of the party that typically initiates legal action to bring the matter within the purview of a court. In a judicial foreclosure jurisdiction, it is the lender that initiates a lawsuit pertaining to the disputed loan (to obtain an affirmative ruling from the court enabling the transfer of the title to the property). In a non-judicial foreclosure jurisdiction, it is typically the homeowner who goes to court to seek to enjoin the potential sale of their home.
In non-judicial foreclosure jurisdictions, the legal right to foreclose and sell the property lies with a third party known as a trustee. In such a jurisdiction, if you fall behind on your mortgage payments, you may receive a notice of default. When you take out a loan from a mortgage provider in a non-judicial foreclosure jurisdiction, you sign a deed of trust, which confers upon the trustee the right to sell the home if you fail to make payments.
The non-judicial foreclosure process is initiated when the lender notifies the trustee that you have failed to make agreed-upon payments on the mortgage. Upon receiving that notice from the lender, the trustee issues a notice of default to you; the notice is typically published publicly, such as in the local paper. When the legally required notice period has expired, a public auction is held on your property. Prior to the occurrence of the auction, you may seek to file a lawsuit to enjoin the trustee’s sale of your property.
It should be noted that in all states—both judicial foreclosure and non-judicial foreclosure—you have the right to redeem your home before the foreclosure sale. This refers to either paying off the total debt, including principal plus additional costs incurred by the lender and interest, before the foreclosure sale; or paying off the purchase price of the home (also plus costs and interest) after the foreclosure sale in order to reclaim the property.
The above article does not provide legal advice; instead it provides general information.