No word strikes greater fear in a homeowner’s heart than “foreclosure.” But what exactly is a foreclosure?
Foreclosure is a process. It’s the process your lender or the current owner of the loan must go through to force the sale of your home to collect an outstanding debt.
When you signed the mortgage or deed of trust for your home loan, you gave the lender the legal right to foreclose. In this document, you gave to your lender a security interest in your house to guarantee repayment of your mortgage. Once you stop paying your mortgage, your house can be sold without your consent so that your lender can recoup the amount it loaned to you.
In a little fewer than half the states, foreclosures are judicial, meaning they go through court; in others, your house can be sold without a judge’s approval in what is called a power of sale or nonjudicial foreclosure. If you know that you won’t lose your house unless a judge gives an official go-ahead, your strategy will likely be different than if your foreclosure will be proceeding without judicial oversight. This is because court foreclosures usually take longer than nonjudicial ones, and it’s easier to raise the common defenses to foreclosure when you automatically get face time with a judge.
With some exceptions, foreclosures normally go through court in the following states: Connecticut, Delaware, District of Columbia (sometimes), Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana (executory proceeding), Maine, Nebraska (sometimes), New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma (if the homeowner requests it), Pennsylvania, South Carolina, South Dakota (if the homeowner requests it), Vermont, and Wisconsin.
Foreclosures are typically nonjudicial in the following states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia (sometimes), Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico (sometimes), North Carolina, Oklahoma (unless the homeowner requests a judicial foreclosure), Oregon, Rhode Island, South Dakota (unless the homeowner requests a judicial foreclosure), Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming. Though, in these states, the lender can opt to foreclose through court instead.
If you’re facing a foreclosure, before you decide what to do, you need to figure out how your foreclosure will proceed in your state and your situation. (To learn how to look up the foreclosure laws in your state on your own, see Finding Your State's Foreclosure Laws. If you aren't comfortable doing your own legal research or you have questions about the process in your state, talk to a local foreclosure lawyer.)
If your house sells for less than you owe on it, in many states, the lender can sue you for at least some of the difference and get what's called a "deficiency judgment." Homestead laws (state laws that protect your home equity from creditors) don’t help you, because mortgage debt has priority over any homestead rights your state’s law provides. One reason many people file for bankruptcy when faced with foreclosure is that bankruptcy eliminates liability for deficiencies.
Here’s an overview of your main alternatives when you think foreclosure is on the horizon:
This provides a general overview of how foreclosure works, but laws differ from state to state. To get specific information about your state's foreclosure procedures and how they apply to your particular situation, consider talking to a local foreclosure attorney.