Foreclosure means the lender takes your home away for nonpayment

What is foreclosure?

Foreclosure is the process the lender uses to take your home away if you do not make your monthly payments. The lender can foreclose for other reasons, but nonpayment is the overwhelming reason. There are two types of foreclosure. Judicial foreclosure is a court action. It is seldom used compared to what is commonly called nonjudicial foreclosure. Although judicial foreclosure has its place and can be successfully used to obtain deficiency judgments when nonjudicial foreclosure cannot, you as a borrower will most likely never be faced with it.

What are the advantages and disadvantages of judicial foreclosure?

The major advantage to judicial foreclosure is that the lender may obtain a deficiency judgment that could not be obtained with a nonjudicial foreclosure. The deficiency judgment lets the lender hold the borrower personally liable if the property does not sell at the auction for the amount owed to the lender. If a lender uses this process, you should immediately consult a lawyer to see what the consequences will be. These are state proceedings and are not the same in each state. There are several disadvantages to judicial foreclosure, which is why it is not frequently used. These disadvantages include the following.

Since it is a court action, it is more time-consuming and expensive than nonjudicial foreclosure.
There is usually a longer redemptive period for judicial foreclosure than nonjudicial foreclosure. This means that the borrower can buy back the property after the auction sale, creating an uncertainty for the new owner's ability to keep the property. This may delay repairs or remodeling.
The deficiency judgment obtained may not be collectible since most borrowers who are solvent do not default on their mortgages. The judgment may also be discharged in a bankruptcy proceeding since it is unsecured. The security (the real estate) is no longer owned by the borrower.

What is nonjudicial foreclosure?

Nonjudicial foreclosure is, as the name implies, a procedure that does not use the courts. It is a process by which the lender causes the property to be sold to pay off the loan. It is the subject of this article.

How does the foreclosure process work?

The process of foreclosure is set by state and federal law, and it differs depending on the state the property is located in and the type of loan. There are three steps common to every foreclosure.

1. First, notice is given to the borrower that the loan is in default and that the lender intends to begin foreclosure proceedings. This notice can be given as soon as the first payment is missed or may not be sent until after several payments are missed. However, the foreclosure process does not begin until after the notice of default is given to the buyer, regardless of how few or how many payments have been missed.

2. Second, there is a period of time during which the borrower can bring the payments current, or in some other way satisfy the lender. Satisfying the lender can be accomplished by arranging a change in the requirements of the loan, refinancing and paying off the foreclosing lender, or selling the property and paying off the foreclosing lender. This time period will also vary depending on the location of the property and type of loan.

3. Third is the sale of the property at a public auction to satisfy the debt. Some states allow a period after the sale for the borrower to redeem (buy back) the property. This can be as short as three days or as long as one year. Most buyers do not redeem.

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