Sometimes, months or even years might pass by after a borrower stops making loan payments before the lender initiates a foreclosure. So, it's important for borrowers who're significantly behind in payments and facing foreclosure to understand what a statute of limitations is, as well as be aware of the time limit for their particular state, to ensure that a statute of limitations doesn't bar the action. (To learn what foreclosure is, how it works, and what options are available to you when facing foreclosure, see What Is Foreclosure? An Introduction.)
A statute of limitations sets a time limit for initiating a legal claim. All types of legal actions have a statute of limitations. The time frame will vary based on the type of action or claim; different statutes of limitations exist for oral contracts, written contracts, personal injury, and fraud. In the context of home foreclosure, the statute of limitations for written contracts is usually the applicable statute. Or, state law might provide a specific statute that addresses foreclosures.
If the lender initiates a foreclosure after the statute of limitations has expired, the borrower can raise it as a defense, and the court will likely deem the lender’s claim invalid.
If the statute of limitations has run out, you must raise this fact in front of a judge—which is easier in a judicial foreclosure than a nonjudicial one—in order to defeat the lender’s foreclosure action. If you don't assert a statute of limitations defense, then this defense is deemed waived. So, it's critical that borrowers are aware of the statute of limitations in their state because it could mean a quick end to a foreclosure if the time limit has expired.
On the other hand, if the statute of limitations runs out after the lender starts the process, then the statute of limitations will not work as a defense to the foreclosure. Even when a foreclosure takes years to complete (which is common in some states), if the time period under the statute of limitations covering foreclosures runs out while the foreclosure is in process, the foreclosure can still proceed.
Example. Say your lender files a foreclosure lawsuit against you in January of 2012, and the statute of limitations runs out in June of 2012, while the foreclosure is pending. You can't bring up the statute of limitations as a defense in this situation.
To comply with a statute of limitations, the lender simply has to begin the foreclosure before the specified period expires. But if the foreclosure is canceled or dismissed—perhaps due to a procedural error on the part of the servicer (the company that manages the loan account)—then the statute of limitations will apply to any subsequent foreclosure. The lender could restart the foreclosure, but the restart would have to occur within the time period provided for in the statute of limitations. Going back to the example above, if the foreclosure was dismissed in April of 2012, the lender would need to start another foreclosure before June of 2012 to fall within the statute of limitations. However, if the borrower makes a payment in the interim, the statute of limitations usually resets.
Each state has its own set of statutes of limitations. Generally, for a written contract, including mortgages and deeds of trust, the statute of limitations will vary from three years to 15 years, though it differs from state to state. Most fall within the three-to-six-year range. To determine the statute of limitations in your state, review your state's laws or talk to a lawyer. (To get help on researching your state's foreclosure statutes, see Finding Your State's Foreclosure Laws.)
The clock for the statute of limitations in a foreclosure usually starts when the default occurs—that is, when the borrower stops making mortgage payments. So, the statute of limitations is generallly calculated from the date of the last payment or from the due date of the first missed payment. Again, this depends on your state's laws.
The foreclosure process varies from state to state and a statute of limitations defense is a valuable tool that can stop a foreclosure in its tracks if used appropriately. If you think that the statute of limitations has expired, consider talking to an attorney who can advise you about the likelihood of success for a statute of limitations defense, as well as identify any other defenses or deficiencies in the lender’s foreclosure action.