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 mortgage payments 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 foreclosure.
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, for instance.
In the context of home foreclosures, the statute of limitations that's relevant is often the one for enforcing a promissory note, which is a written contract. But the law varies from state to state. State law might provide a specific statute that addresses foreclosures. Or the relevant statute of limitations could be the one for enforcing a security interest in land, such as a security interest created by a mortgage or deed of trust.
The statute of limitations for an unpaid installment usually starts to run when the borrower defaults on the loan by missing a payment. Some courts treat each missed payment like a new default, which restarts the clock. For the full loan, the statute of limitations usually begins when the loan becomes due (that is, on the loan's maturity date). The limitations period can also start when the lender accelerates the loan. Exactly when the statute of limitations starts to run depends on state law and the circumstances.
If the lender initiates a foreclosure after the statute of limitations has expired, the borrower can raise it as a defense. You must raise this issue in front of a judge, which is easier in a judicial foreclosure than a nonjudicial one, 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.
If the statute of limitations runs out after the lender starts the process, then the statute of limitations won't work as a defense to the foreclosure. Even when a foreclosure takes years to complete (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.
For example, say your lender files a foreclosure lawsuit against you in January of 2018, and the statute of limitations runs out in June of 2018, 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, then the statute of limitations will generally apply to any subsequent foreclosure—if the lender didn't revoke the loan's acceleration. So, 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 2018, the lender would need to start another foreclosure before June of 2018 to fall within the statute of limitations. But if you make a payment in the interim, the statute of limitations usually resets. Also, the statute of limitations generally starts over if the lender de-accelerates the loan by giving clear notice that it is canceling the acceleration and permitting you to keep making payments. (Though, at least one court has ruled that simply dismissing a prior foreclosure action de-accelerates the loan.) But entering into a repayment plan or considering you for a loss mitigation option, such as by accepting loan modification trial payments, doesn't necessarily de-accelerate the loan. Again, state law and the circumstances determine whether the loan was de-accelerated and the statute of limitations restarted.
Statute of limitations laws are complicated and vary quite a bit from state to state. While a statute of limitations defense is a valuable tool that can stop a foreclosure in its tracks, you have to use it appropriately. If you think that the statute of limitations has expired in your situation, consider talking to a lawyer in your state who can advise you about the length of limitations period and when it begins to run in your case, as well as advise you about the likelihood of success for a statute of limitations defense. A lawyer can also identify any other defenses or deficiencies in the lender’s foreclosure action.