Our process overview gave a basic description of how foreclosure properties move through the steps of default to repossession. A few more details are important to get a deeper understanding of foreclosures on homes. These details include the judicial versus non-judicial foreclosure process and the clearing titles and liens for foreclosure sales.
In step four of the process, when the mortgage was legally accelerated and the original loan terms canceled, the lender would initiate a lawsuit against the homeowner to declare the property was exiting pre-foreclosure and would become one of their homes foreclosed on. Local foreclosure laws would dictate how this declaration is made, but it must generally be made public. Once these formal steps are complete, one of two procedures takes place: a non-judicial foreclosure plus sale or a judicial foreclosure plus sale.
The non-judicial approach allows the property to be sold without judicial proceedings, or outside of a court. In states using this approach, the loan documents outline how the power-of-sale can be executed by the lender, including how the default and sale notice need to be communicated. Sales of non-judicial foreclosures can occur as soon as the 91st day after the sale plan is publicized.
The judicial approach is used by more states. The lender’s lawsuit passes through a court action to establish a judgment price, or minimum bid, due to the lender. After a public notice period, foreclosure auctions are conducted in public at the courthouse. If no bidders offer to buy the home at the judgment amount, the foreclosed homes will have their title transferred to the original lender. If a bid is received above the judgment amount, excess funds will be issued to settle certain lien holder claims.
Depending on the state where the foreclosed homes reside, certain claims to title and other liens will most likely be attached to the home. The mortgage lender will usually be first in line to claim title to foreclosed homes, but other liens or claims may have been made against the home to secure other debts or obligations the homeowner may have created and secured with the value of the home. These liens can include the first mortgage, any second mortgages or equity lines opened against the home’s value above the mortgage balance, tax liens, or judgment liens. Additional liens and interests may be placed against the home prior to the start of the foreclosure activity. Depending on when the liens were applied, they will be classified as senior or junior liens. Senior liens will have priority for settlement prior to releasing the home title to the foreclosure buyer. Some of these liens may or may not have a right to initiate a foreclosure, but they may have a right to be settled before the home is re-sold. Many junior liens will be eliminated when the foreclosure is processed. Title and lien search is a critical part of clearing the purchase of homes from foreclosure auctions.
Property Foreclosures Summary
You now have an overview of the reasons why foreclosures happen and the steps involved in moving a house through the cycle of the foreclosure process. You’ve seen how regular homeowners turn their houses into preforeclosures with as little as one missed payment. You can appreciate the evolution of a home’s status from notice of default through real estate foreclosure auction. And you know how these properties became REO properties and government repossessed homes. You also have a better idea of the types of procedures that state laws require when situations arise to have homes foreclosed on.
The good news is that from misfortune often springs opportunity. Acting on your newly gained knowledge of how to buy foreclosure property may benefit both you and the seller, be they the existing home owner, a bank or the government. In our following Foreclosure Buying Guide chapters, we will explore some common themes for all types of foreclosure listings. We will take a deeper look at what these listing types are, where to find them and how to profit from your investment in each.Foreclosure timeline