The Foreclosure Process by State
The foreclosure process varies based on your state, but we'll cover the basic foreclosure procedure. For more information on your state's specific foreclosure process, just Google your state's name plus "foreclosure process."
The Foreclosure Process Begins
Based on the language in your mortgage, the foreclosure process could potentially commence after a single payment isn't made on time. More realistically, the process will go like this:
1. A payment is missed
2. The grace period (often 5-15 days) passes
3. The lender tacks on a late fee
4. If a second payment is missed, the calls begin - the lenders may work with the borrower, or they may refuse to accept anything but full payment
5. After a third payment is missed, the lender will often begin the foreclosure process in earnest (until this point, the borrower is in "pre-foreclosure")
This is where things will depend on which type of state you're in. All states can use a "judicial sale," which requires going through the courts. Some states also allow the use of "power of sale," which the lender can complete without going to court.
There is a third foreclosure procedure, which is rarely seen anymore (and only allowed in Connecticut and Vermont), and it's called "strict foreclosure." This type has no redemption period (this term is described below).
Foreclosure Law for a Judicial Sale
The judicial sale is the most commonly seen type of foreclosure process, and it goes like this:
1. The lender must file suit in the local courts
2. The borrower gets a "Notice of Default" from the lender
3. The borrower has a specified period of time (usually 30 days) to make payment and head off the foreclosure
4. If the borrower does not make payment, the lender gets a judgement and can request that the property be sold at a sheriff's sale
5. The sheriff holds the auction "on the courthouse steps" (which is usually really in some dingy government office)
6. Your state may have a "redemption period," which is a period of time (sometimes up to six months) where the owner can continue to live in the house and pay off the lender (in full, inclusing legal expenses) or potentially sell it (if there was equity enough)
7. After the sale (and any redemption period), the sheriff will execute an eviction warrant, and the bank will secure the house and get it ready to market.
Foreclosure Law for Power of Sale
Power of Sale doesn't require the court process that a Judicial Sale does, so this foreclosure procedure is a little simpler:
1. The lender serves up papers demanding payment
2. After a specified waiting period, a deed is created to transfer the property to a trustee
3. The trustee posts public notice of an auction, if required
4. The trustee sells the property at public auction
5. The sale may be subject to judicial review, as no courts were involved
Foreclosure Process When Multiple Lien-Holders are Involved
If the borrower has additional liens against the property, like a second mortgage, Home Equity Line of Credit (HELOC), or even liens by an unpaid contractor, those additional lien-holders must be notified of the foreclosure sale.
As "junior lien-holders," they have the right to buy out the senior lien-holders at auction. If they don't, what happens depends on the amount of proceeds from the sale. If there was enough to satisfy all senior lien-holders (those whose interests were recorded ahead of theirs), than the additional funds up to what they were owed go to them (and then lien-holders below them, and eventually to the borrower if money is left).
More often, the proceeds from a sheriff's sale are not sufficient to pay off junior lien-holders, and they get wiped out.
Since we're discussing the "typical" situation, here are a couple other real-world generalities:
1. If there was equity in the house, the borrower would have sold it before it could be foreclosed
2. Often, the lender buys the house back at auction (by bidding what they're owed), and then re-markets it to the public
Further Action by Lenders After a Foreclosure
Lenders have two additional paths of recourse against a borrower after a foreclosure which may be considered:
1. A "deficiency judgement" is a a judgement against the borrower for the difference between what was owed and what the house sold for at auction - this judgement could be collected upon like any other judgement, and homeowners facing these often file bankruptcy if they can't pay
2. The lender can "1099" the borrower, or report the loss as a taxable earning to the borrower - in other words, the borrower would have to pay income tax on the bank's loss, or have an accountant classify them as unable to pay (this is more common)
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