There are two primary types of foreclosure procedures: judicial and non-judicial.
Judicial procedures are followed by states that use mortgages as the security
instrument for property loans. Non-judicial procedures are used by states that use deeds
of trust as the security instrument.
Judicial Procedures
Foreclosures based on mortgages are known as judicial foreclosures because court action
is required. Judicial foreclosure procedures consist of the following steps: default,
court action, notification, advertisement, and sale.
Default
In accordance with the terms and conditions of the mortgage and the note, the mortgagor
is required to make periodic payments. When an owner misses a mortgage payment, he is said
to be in default. The lender sends a letter asking for prompt payment of the mortgage and
late fee. The lender sends a more urgent letter when the second payment is missed.
Usually by this time, the lender has turned the case over to its collections department.
The collections department contacts the homeowner to resolve the case. The homeowner is
given 15 to 30 days to bring the back payments or arrears current. If the homeowner does
not or can not pay the arrears, the lender will then initiate the foreclosure. Typically,
lenders will foreclose after three months of default on conventional loans. They will
foreclose after six months of default for FHA or VA mortgages.
Court Action
To foreclose in accordance with the judicial procedure, a lender must prove that the
mortgagor is in default. Once the lender has exhausted its internal attempts to resolve
the default with the homeowner, the next step is to contact an attorney to pursue court
action. The attorney contacts the mortgagor to try to resolve the default. If the
mortgagor is unable to pay off the default, the attorney files an action with the court.
The action gives notice to the public that there is a case against the mortgagor. The
purpose of the action is to provide evidence of a default and get the court's approval to
initiate foreclosure. This court action could take 30 days, depending on the local
jurisdiction.
Notification
Once the attorney gets a positive ruling from the court, he files a Notice of Default
with the county clerk's office. The notice is sent to the mortgagor, by certified mail,
and also to any junior mortgagees who may have requested notice. It specifies the amount
of the default and the date by which the amount is due. The notice essentially grants the
mortgagor a period of time during which he can pay the amount without incurring further
penalty. This is known as the reinstatement period, and is about 30 days.
Advertising
The attorney's next step, assuming the mortgagor does not cure the default, is to
prepare a Notice of Sale. This notice must be advertised in accordance with the
requirements of each state. Attorneys satisfy the publishing requirement by either
advertising the auction in a local newspaper, affixing it to the property, or posting it
near the courthouse. They satisfy the schedule requirement by publishing the notice as
often as dictated in the language in the mortgage or according to a specific timeline,
such as once a week for three weeks or five times in 10 days.
Sale
If the mortgagor still cannot reinstate the loan during the reinstatement and
advertising periods, the property is then sold at a public auction. The attorney conducts
the sale that is held either at the courthouse steps, the attorney's office, or in front
of the property itself. At the auction, the attorney encourages bids from interested
third parties. The sale is conducted very quickly, usually in less than five
minutes. Once the property is sold to the high bidder, the attorney collects the deposit
and issues a certificate of sale. The proceeds from the sale are applied to the
debts associated with the property in order of their priority. If there is no high bidder
from among the third party investors, the property reverts back to the lender.
Some jurisdictions have a ratification period during which the homeowner has the right
to buy back the property that was sold at the auction. The terms and conditions vary in
each jurisdiction, so you should check with the local foreclosure attorneys for details.
Non-Judicial Procedures
Foreclosures based on deeds of trust are known as non-judicial foreclosures. This is
because deeds of trust contain the power of sale clause that enables the trustee to
initiate foreclosure, without having to go to court. This is the basic difference between
the non-judicial process and the judicial process.
If the trustee is not available, the beneficiary (lender) can appoint a substitute
trustee to initiate the foreclosure. The substitute trustee or simply the trustee is
required to issue a notice of default and notify the trustor (borrower) accordingly. The
trustee then proceeds with the notice of sale and begins the advertising. The trustee
conducts the sale in the same manner.
Source:teamforeclosure.com
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