Foreclosure is a legal process that allows a bank or other lender to recover the amount owed on a defaulted home loan (mortgage). Foreclosure can result in an individual and/or family losing their home.
When a borrower purchases a home and obtains mortgage financing, they sign a contract stating that the home serves as collateral for the loan and may be repossessed in the event the borrower does not make payments as required. Banks don’t want to own houses, so in general they try to work with borrowers to get them caught up on payments and avoid foreclosure. In some cases, a lender will provide a grace period in which a payment can be made in order to avoid foreclosure proceedings.
After a borrower misses a certain number of payments (usually three or four – the mortgage documents will state how many missed payments trigger foreclosure), the lender has the authority to seize the property from the borrower and sell it to recover the debt.
What Types of Foreclosure Are There?
There are three types of foreclosure:
- Judicial sale foreclosure
- Power of sale foreclosure
- Strict foreclosure
Foreclosure by judicial sale is available in all states and is the only type available in some.
What is a Judicial Sale Foreclosure?
Foreclosure by judicial sale is a type of legal action where the mortgaged property is sold under the court’s supervision. Only after the court decision is finalized can a sale of the property proceed.
There are two categories of parties involved in a judicial sale: “necessary” parties and “proper” parties:
- “Necessary” parties are those parties that are required to be included in the foreclosure process. The party that brings the foreclosure lawsuit must name these parties in the case, even if they do not consent. Any parties that acquired a lease, lien, and/or easement after the mortgage was executed is also considered a necessary party.
- For example, say the borrower takes out an initial mortgage from one bank as well as a second mortgage from another bank. Because the second bank obtained their interest after the initial mortgage, they must be named in the foreclosure suit.
- A “proper party” is a party that may be helpful in a foreclosure process but is not essential to the lawsuit. A proper party is considered a voluntary party and cannot usually be named without their consent. They are normally not affected by the outcome of the lawsuit. In some cases, the court may order a proper party to be named in a case if their input would be helpful for the judicial sale.
What is a Power of Sale Foreclosure?
Another type of foreclosure is called power of sale foreclosure, or non-judicial sale. In this type of foreclosure, there will be no court process. The bank will handle the sale of the property on its own, without court supervision. Because there’s no need to undergo a court trial, foreclosure by power of sale is less complicated, easier, and typically quicker.
What is a Strict Foreclosure?
Strict foreclosure is a specific type of judicial sale foreclosure. In strict foreclosure, the court orders the borrower to pay the mortgage within a specific period of time. If the borrower fails to do so, the lender will automatically repossess the property without any obligation to sell the property. Because the property is not sold, the borrower still owes the full amount of the mortgage. Strict foreclosure is only available in a limited number of jurisdictions, namely places located in New Hampshire and Vermont.
How Does the Borrower Know if the House is in Foreclosure?
When a borrower misses a payment, a bank loan officer will give them a call and remind them to make the missing payment. Late fees will most likely apply.
With a second missed payment, the loan officer will call and demand that a payment be made over the phone immediately. Again, late fees will apply.
The third (or in some cases, fourth) missed payment triggers the foreclosure clause in the loan documents. The borrower will receive a written notice of breach of the mortgage contract. If the mortgage contains an “acceleration” clause, this means that the entire amount of the mortgage must now be paid within 30 days. If the borrower cannot pay off the mortgage, the bank will begin foreclosure proceedings. This is where it is most important to obtain the services of a knowledgeable foreclosure lawyer.
What Are the Steps in a Foreclosure?
Here is a general description of the steps that occur in a foreclosure:
- The bank notifies the borrower that it intends to foreclose on the house
- A negotiation period takes place, with both sides hoping to save the property from foreclosure
- If the parties cannot come to agreement, the bank files a lawsuit in the county courts
- If the court approves the foreclosure, the local sheriff auctions the property to the highest bidder, or the bank becomes the owner in order to sell it themselves
- The bank padlocks the property if it is empty. The bank may not padlock the house if the homeowner is still living in it
- If the bank cannot sell the property, it will seek judicial remedies to recover the amount of debt from the borrower
Where Do Mortgage Proceeds Go?
The money gained by the sale of the property will be used
- To pay off the amount of the debt the borrower has defaulted
- To any holder of a second mortgage or a lien holder (someone who has the right to be paid when the house is sold, such as a contractor or other home services provider)
- In the case where there is money left over, to the homeowner
Will It Help If I Work with the Bank?
The process of foreclosing on a house takes time, and the bank has to pay the costs of the lawsuit. Banks are often willing to make arrangements to avoid such time-consuming, expensive and complicated measures. It is a good idea to move quickly on your own behalf by talking to your lender right away to discover the possible options you have to resolve the matter favorably and retain ownership to your property.
Be sure to explain your current financial situation and be cooperative with the bank, no matter how frustrated you may be. Sincerity and a collaborative spirit increase the chances that you’ll get new payment terms on your loan, instead of foreclosure.
Do I Need a Lawyer if the Bank Wants to Foreclose on My House?
There may be legal troubles where you do not need a lawyer, but this is not one of them.. Real estate law is complicated, particularly in the case of foreclosure. If you are at risk of losing your home, it is critical to have the help of a knowledgeable, experienced foreclosure lawyer. Among other things, an attorney will:
- Review all the complex mortgage documents
- Make sure you are receiving all the notices from your lender because failing to respond to one will not be excused by the court with the bescuse that you did not receive a notice
- File an objection to the foreclosure if that is appropriate
- Negotiate with the bank
- Represent you in any legal proceedings
- Ensure that your rights and interests are protected
- Save you from the widespread problem of sham companies offering to fix your mortgage problem
Protect your interests by hiring a foreclosure lawyer. Make sure you are doing the best you can to protect your most important asset.
