If you don’t make your mortgage payments, the bank can sell your home to pay off the unpaid debt. The legal process for this is called foreclosure. Foreclosures are either judicial (through the court system) or nonjudicial (out of court) depending primarily on what state you’re in.
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.
In some states (and the District of Columbia), the bank can foreclose without court action.
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, 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 takes from about six months to just over three years, depending on the state.
Below are the steps in a typical nonjudicial foreclosure.
Under loan servicing rules that went into effect January 10, 2014, the holder (the owner of the loan) or loan servicer (the company that you make your payments to) cannot start the foreclosure until you are 120 days (four months) delinquent on your payments. You can use this time to apply for an alternative to foreclosure such as a loan modification, forbearance, or short sale.
During this time frame, the holder or servicer can still send you notices letting you know that you are behind in your payments and/or that provide information about legal aid, counseling, or other resources.
Most mortgages and deeds of trusts have a clause that requires the foreclosing party to send you a notice (often referred to as a breach letter) to inform you that you are in default on the mortgage. You’ll usually get 30 days to cure the default before the foreclosing party accelerates the loan. (The acceleration clause in a mortgage or deed of trust allows the foreclosing party to call the entire loan due if you default on the payments.) The breach letter may be sent during the 120-day pre-foreclosure period.
If you don’t cure the default, the holder or servicer will move forward with the foreclosure.
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 between 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, 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. The actual foreclosure procedures and the notices the borrower will receive as part of the process varies widely from state to state. Where you live, you may receive:
At the foreclosure sale, the property may be sold to a third-party, but in most cases it will revert to the foreclosing party.
In some states, the homeowner gets the right to live in the home after the foreclosure sale during what’s called the "redemption period." (A redemption period is a period of time when the foreclosed homeowner gets the right to buy back the home after the foreclosure. Learn more general information about the right of redemption.)
After the foreclosure sale or the expiration of the redemption period (depending on the circumstances), the new owner can initiate an eviction action to remove the foreclosed homeowners from the home if they have not already left.
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. Learn more in our article on Deficiency Judgments.)
Foreclosures are usually nonjudicial in the following states:
Even if your state allows a nonjudicial foreclosure process, 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 cannot obtain a deficiency judgment unless it forecloses through the courts.)