A foreclosure is a judicial proceeding where the lender, often a bank, takes possession of a house or property due to the homeowner failing to keep up with their mortgage payments. After the borrower misses a specific number of payments, the lender may seize the house or property and sell it to retrieve what is still owed on the mortgage.
A foreclosure by sale is a process whereby a house or property is sold at a public auction to fulfill the debt in whole or in part. There are judicial and nonjudicial foreclosure sales that may happen.
In a judicial sale, intervention from a court is needed to sell the mortgaged property. This process is available in every state.
On the other hand, nonjudicial foreclosure is not available in every state. It is also known as a foreclosure by power of sale. In this type of foreclosure, the lender is allowed to sell a mortgaged property directly to retrieve any money still owed.
No matter which type of foreclosure process the lender uses, the home or property belongs to the lender once it is complete. Depending on the state where the foreclosure happens, the law may allow the borrower to reclaim their house.
What Does the Foreclosure Process Involve?
Although the foreclosure process may differ from state to state, it is typically very straightforward. The process generally lasts six months. The length of the process depends on whether foreclosure is a judicial or nonjudicial sale.
The steps, in general, are as follows:
- Notice of default;
- Foreclosure auction; and
Property is in pre-foreclosure after a borrower fails to make two to three mortgage payments, typically 30 to 60 days. When a property is in pre-foreclosure, a lender will normally send a demand letter demanding full and immediate payment of the loan and any legal and late fees incurred. The borrower then has 30 days to make the payments on the debt owed, or the foreclosure process will be initiated.
After the borrower has failed to pay for 90 days, the foreclosure process enters into the legal process. The bank will issue a notice of default to the local sheriff to deliver to the borrower at this stage. The government agency will record this notice of default, and a date will be chosen for the foreclosure auction.
The public foreclosure auction will be held on the specified date, and the property may be sold to the highest bidder. The lender that issued the default may also buy the property and sell it independently at a private sale. The borrower must vacate the property, or an unlawful detainer action will be filed to evict the homeowner if they stay on the property following the sale.
Suppose the sale proceeds are inadequate to satisfy the debt being foreclosed upon in the post-foreclosure period. In that case, a lender may claim a deficiency judgment and require the borrower to pay the difference. In some states, a borrower may have the right to redeem the property following the foreclosure by paying the full sales price.
What Is Foreclosure by Power of Sale?
In a foreclosure setting, “power of sale” refers to the sale of mortgaged property by the lending institution (usually a bank) rather than through the supervision of the court.
Because the court system is typically not involved, foreclosure by power of sale is usually completed more rapidly than court-supervised sales (judicial sales). The terms of sale are occasionally displayed in the mortgage contract itself.
In a foreclosure by power of sale, the sales proceeds will first go to the mortgage lender, then to other lien holders (such as junior mortgages). Lastly, if any proceeds are left over, these will be distributed to the mortgagor (the borrower); nevertheless, the proceeds are usually exhausted.
What Are Some Pros and Cons Associated With Power of Sales?
There are multiple benefits and drawbacks associated with foreclosure by power of sales. Depending on your situation, some features of the power of sales may work for you, while others may not be favorable.
Some of the pros and cons of power of sale foreclosures include:
- Involves little to no court intervention, which makes the process more practical
- Terms of the sale can often be customized and pre-negotiated between the lender and borrower in the mortgage contract
- It can occasionally result in all of the parties receiving proceeds from the sale
- The right to foreclosure by power of sale is not available in all states; some jurisdictions require that the right be stated in the mortgage agreement
- In some jurisdictions, a deficiency judgment is not available if the parties choose to foreclose outside of court proceedings
- Even though the court may not be involved at the beginning, court intervention may still become required in the long run, for example, if there are defects in the deed
Depending on your situation, power of sale may or may not be the right choice for you. If you have questions about whether to seek foreclosure by power of sale or by other means, you may wish to speak with an attorney.
What Is a Deficiency Judgment?
A deficiency judgment is a court judgment issued when a borrower takes out a loan and cannot pay the total amount owed at the time of sale. By way of example, let’s say a borrower buys a home for $500,000 and takes out a loan (mortgage) for $400,000.
The borrower neglects to pay her loan principal and falls behind on their monthly mortgage payments, owing $400,000 on the loan. The property is sold for $350,000. The lender can get a deficiency judgment for the remaining $50,000.
How Is the Deficiency Obtained?
Suppose the amount owed on the loan is more than the sales proceeds from the sale through foreclosure, and your lender gets a deficiency judgment against you. In that case, you become personally responsible for the judgment amount. In that regard, you become legally bound to pay your lender. Mortgage lenders can collect deficiency judgments in any of the following ways:
- Getting liens on any other properties in your name: A lender can place a lien on any of your assets, including other real estate properties that you own if any.
- Garnishing your wages: Lenders can take a piece of your paycheck for as long as the debt is repaid in full.
- Levy your accounts: Lenders can take cash for your bank accounts to satisfy the debt.
Depending on the specific regulations in your state, the lender can also freeze your bank account until some amount of the deficiency is satisfied.
How Are Deeds of Trust Related to Foreclosure by Power of Sale?
In many jurisdictions, a deed of trust is required to execute a foreclosure through the power of sale.
A deed of trust is an agreement that transfers the property from the mortgage holder to a trustee, who will then hold the property in trust for the mortgage holder. When the time comes for a property sale, the trustee will conduct the sale rather than the mortgage holder.
Occasionally, the lender is permitted to bid on the property to reclaim ownership of the property.
Do I Need a Lawyer for Power of Sale?
If you are involved in foreclosure proceedings, a foreclosure lawyer can help you determine whether the power of sale is applicable in your jurisdiction. If so, your attorney can help guide you through the process to ensure that your interests are represented and fully protected.
Working with a lawyer may even be necessary for particular requirements, for instance, if your jurisdiction requires a deed of trust for the sale.