The Property Foreclosure Process

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

In this lesson, we will discuss the process of judicial foreclosure and a lender's opportunity to pursue a deficiency judgments. We will also discuss the concepts of equitable and statutory redemption of foreclosed properties.

Judicial Foreclosure

Sean has a problem. He took a massive pay cut this year after getting laid off from his job. He found a new job but he is struggling to pay his mortgage each month. What if he can't make his next few payments? Will he lose his house? The thought of losing his home is alarming. Sean visits a local law library to find out more information about what happens to people in his situation.

After poring through several books and online resources, Sean learns that each state has a system in place for the process of judicial foreclosure. This is the process that occurs when a home loan lender proves in court that an unpaid debt exists for real estate. This can result in sale and seizure of the property. The system protects homeowners from dishonest, mistaken or predatory lenders who would seize the property without due process.

Lender Response to Missed Mortgage Payments

Sean also learns about the typical process lenders take when faced with a default on a home loan:

  • The first month Sean misses a mortgage payment, he can expect a letter or phone call from the bank. At this time they will likely ask when they can expect to receive the money.
  • On the second month Sean is late, they will probably be a little more forceful. They will probably want to know why the payments aren't being made. This will give them an idea if the problem is only temporary or going to go further. The bank will almost certainly ask to be paid immediately or as soon as possible.
  • The third month without payment is when difficulties may arise for Sean. The lender will send a very stern letter saying the loan must be fully paid current within 30 days. If Sean doesn't pay the previous three months worth of payments the loan will be accelerated. Acceleration means that the entire balance of the loan becomes immediately due. At this point the loan servicer will no longer attempt to work with Sean. Instead the details of the delinquent loan will be sent to an attorney to begin judicial foreclosure proceedings.
  • One the lender sues for foreclosure in the local county court, Sean can expect to be served a legal summons to appear before the court within a few weeks or months (depending on the court). Sean can choose to respond and fight the foreclosure in court or not. If Sean has a legal reason to defend against the foreclosure claim (i.e. if he had no prior warning from the lender), he might be able to delay or hold up the foreclosure. If he doesn't respond, the lender will win a foreclosure judgment by default.
  • Once a court order is issued, the property goes up for public auction at a specified date and time. Typically the lender will be the high bidder at this public auction. This is so they still have an interest in going after Sean if they can't sell the house at a high enough price to cover the mortgage balance. While this is going on Sean will probably still be living in the home. Once the property is bought at auction by the lender and the court approves the transfer of title, Sean will be evicted if he hasn't already left.

Equitable and Statutory Redemption

Equitable redemption is a legal concept that allows a homeowner to redeem his mortgage and prevent losing his home to foreclosure if he can pay all delinquent payments on the loan. Getting current on the loan may also include paying additional fees and interest. If Sean doesn't have the money for all this, it may be possible for him to refinance or sell the home as an alternative. Every state permits equitable redemption, which must occur before the house is sold.

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