If you don’t make your mortgage payments, the bank can go through a legal process called "foreclosure" to sell your home to pay off the unpaid debt. Foreclosures are either judicial (through the court system) or nonjudicial (out of court) depending on state law and the circumstances. (To learn what foreclosure is, how it works, and what options are available to you when facing foreclosure, see What Is Foreclosure? An Introduction.)
With a nonjudicial foreclosure, the foreclosing party follows a set of state-specific procedural steps to foreclose the home. Read on to learn details about how nonjudicial foreclosures work, what type of notices you’ll receive in this type of foreclosure, whether the foreclosing party can get a deficiency judgment after a nonjudicial foreclosure, and which states typically use a nonjudicial foreclosure process.
When you take out a home loan, you sign either a mortgage or deed of trust, which creates a lien on the property. If the mortgage or deed of trust contains what’s called a "power of sale" provision, and state law allows it, the bank can foreclose the home nonjudicially.
Nonjudicial foreclosures generally proceed more quickly than ones that have to go through the court system. A nonjudicial foreclosure usually takes just a few months, whereas a judicial foreclosure generally might take several months or years, depending on the state.
Below are the steps in a typical nonjudicial foreclosure, although the process varies widely from state to state. (To find out the exact nonjudicial procedures in a particular state, talk to a foreclosure lawyer.)
Under a federal law that went into effect January 10, 2014, in most cases, the loan servicer (the company that you make your payments to) can't start the foreclosure until the borrower is more than 120 days' delinquent on the loan. You can use this time to apply for an alternative to foreclosure, like a loan modification, short sale, or deed in lieu of foreclosure.
The servicer can still send you notices informing you that you're late in payments, like a breach letter (see below), and provide information about legal aid, counseling, or other resources. In fact, in most cases, federal law requires the servicer to inform you about various loss mitigation options that might be available to you.
A nonjudicial foreclosure typically starts when the trustee (the third party that administers nonjudicial foreclosures in many states) records a notice of default or similar document at the county recorder's office. The notice of default is also usually mailed to the borrower,although this requirement varies among states.
The notice of default generally gives the borrower a chance to cure the default before the foreclosure sale can be held. If you don’t cure the default in a certain amount of time, in many instances, a foreclosure sale will be set and the trustee will prepare a notice of sale.
The notice of sale gives the date, time, and location of the foreclosure sale. It is typically:
Differences from state to state. Again, the actual foreclosure procedures and the notices the borrower will receive as part of a nonjudicial foreclosure varies widely from state to state. Where you live, you might receive:
At the foreclosure sale, if a third party makes the highest bid on the home, that person or entity will then become the new owner of the property. But in most cases, the foreclosing party will be the high bidder. (At the foreclosure sale, the foreclosing party typically bids on the property using a "credit bid." A credit bid means that the bank bids the debt that the borrower owes.)
In some states, the homeowner can remain in the home during what’s called a "redemption period." A redemption period is a period of time when the foreclosed homeowner gets the right to redeem (repurchase) the home after the foreclosure. (Learn more general information about the right of redemption.)
After the foreclosure is completed—or after the expiration of the redemption period, depending on state law—the new owner can initiate an eviction action to remove the foreclosed homeowners from the home if they haven't already left.
You might not have to move out of the home right away after the foreclosure sale. Depending on state law, the homeowner might be able to remain in the home until the redemption period expires.
Depending on the laws of your state, the foreclosing party might be able to obtain a deficiency judgment after the nonjudicial foreclosure by filing a separate lawsuit.
When a house is sold at a foreclosure sale for less than is owed on the mortgage loan, the difference between the debt and the foreclosure sale price is called the deficiency. In many states, the foreclosing party can get a personal judgment against the borrower for the deficiency and then take steps to collect on it.
Foreclosures are usually 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.
Even if your state allows a nonjudicial foreclosure process, you should be aware that the foreclosure could be judicial. Banks sometimes choose to foreclose judicially if there are problems with the title to the home, a flaw in the mortgage or deed of trust, or to pursue a deficiency judgment. (In some states, the foreclosing party can't get a deficiency judgment unless it forecloses through the courts.)
If you're facing a foreclosure and want to learn about potential defenses, whether the foreclosing party can get a deficiency judgment against you, or how to avoid a foreclosure by working out an alternative, consider talking to a foreclosure attorney. Contacting a HUD-approved housing counselor is also a good idea.