For example, let’s say a homebuyer takes out a mortgage for $400,000 to buy a single-family home and monthly payments are $2,600. The buyer is approved for the loan based on their income and other financial information. However, if the buyer loses their job and fails to make payments for several months, the bank will eventually have a right to foreclose on the home to sell it to avoid further losses. If a lender decides to take action against a homeowner who defaulted on their payments, then they must go through foreclosure proceedings. In some cases, a court process is required before a lender can move forward with foreclosure; in other cases the lender does not need judicial proceedings to take a property. Once foreclosure proceedings begin, borrowers do have a few options to avoid foreclosure, which we’ll review below.
How the Right of Foreclosure Works
The right of foreclosure starts with a homeowner with a mortgage falling behind on their payments. For mortgages, homes are used as collateral for the loan, which allows the bank to lend the large sum of money for a lower risk. After a certain number of missed payments, a bank will have the right to sell it and use the proceeds to offset the debt instead of taking the significant loss of the full mortgage amount. The timeline for how the right of foreclosure works depends on whether it is a judicial or non-judicial foreclosure, meaning whether or not it requires a court process. It also depends on the laws of the particular state where the property is located. All states, to differing degrees, allow debtors a period of time to “cure,” or resolve their debt and avoid foreclosure. In New Jersey, for example, the Fair Foreclosure Act requires lenders to provide 30 days notice to the borrower before beginning the foreclosure process. The lender will then announce that a foreclosed property is for sale and hold an auction. Proceeds from the sale will be used to offset the debt owed to the lender. Usually lenders exercise the right of foreclosure, but homeowners associations can also enact this right for unpaid dues and assessments.
Types of Foreclosure
There are two main types of foreclosures: judicial and non-judicial. In a judicial foreclosure, the lender must obtain court approval before foreclosing on a mortgage. In a non-judicial foreclosure, permission from the courts is not needed. Non-judicial foreclosures are typically used for deed-of-trusts, most of which have a power-of-sale clause that specifies the property can be sold without the need for a court order. With a deed-of-trust, a third party such as a title company either holds the legal title in a trust or holds a lien on the property. Every state allows judicial foreclosure through the courts, and some states require it. Power-of-sale foreclosures are allowed by many states.
Requirements for Enacting the Right of Foreclosure
For a lender to exercise the right of foreclosure, certain conditions must be met—mainly that the borrower has failed to make a certain number of payments stated in the mortgage terms. A borrower needs to receive a proper notice of default and have the opportunity to fulfill their debt obligations. If it is a judicial foreclosure, the lender must obtain approval to foreclose from the courts during a process in which the homeowner can raise objections. One route borrowers can take to avoid foreclosure is through the right of redemption, or paying the total amount of the loan that is in arrears plus any late fees. State laws vary on how long this period of redemption applies.
