When a borrower purchases a home and obtains mortgage financing (usually from a bank), they sign a contract stating that the home is collateral for the loan and may be repossessed by the bank if the borrower does not make the payments as required.
Foreclosure is the process by which the bank takes possession of the home when a borrower defaults on the mortgage loan. After a borrower misses a certain number of payments, the lender has the authority to seize the property from the borrower and sell it to recover the debt owed for the mortgage.
Sometimes, a lender will provide a grace period in which a payment can be made to avoid foreclosure proceedings. Usually, however, this is a short period, often a couple of months. Often, a borrower is behind on their payments and has difficulty catching up due to late fees.
The two different types of foreclosures are non-judicial foreclosures and judicial foreclosures. A non-judicial foreclosure, or a foreclosure by power of sale, does not require court intervention. The lender, often a bank, can sell the mortgaged property directly to recover the money owed for the mortgage. This foreclosure option is only available in certain states.
On the other hand, a judicial foreclosure is available in every state. It requires court intervention to sell the mortgaged property.
What Is a Foreclosure by Judicial Sale?
A foreclosure by judicial sale is the sale of a mortgaged property with the intervention and supervision of a court. It is often ordered in cases of dispute where the bank and the homeowner do not agree on the status of the property debt. It may also occur if the borrower is insolvent and cannot afford to continue making mortgage payments.
The proceeds from a judicial sale will be used to pay the original mortgage. If any profit remains, other lien holders or second mortgages may be paid from the sale. The borrower will receive those proceeds if any profits remain after all debts are paid.
Which States Allow Foreclosure by Judicial Sale?
As noted above, while only some states allow for non-judicial foreclosures, all states allow foreclosure by judicial sale. In many states, judicial sale is the required method for foreclosure.
What Is a Necessary Party to a Judicial Sale?
An important aspect of any foreclosure process is ensuring that all necessary parties are included. The parties to a judicial sale may be divided into “necessary” parties and “proper” parties.
Necessary parties are those parties that are required to be included in the foreclosure process. Any party that has acquired an interest in the property after the initial mortgage is taken out is considered necessary. The party that brings the foreclosure lawsuit must name these parties in the case, even if they do not consent to be included.
Any parties that acquired a lease, lien, or easement after the mortgage was executed are also considered necessary. For example, say Party A (the borrower) takes out an initial mortgage from Party B (a mortgage lender) as well as a second mortgage from Party C (a bank). Because Party C obtained their interest after the initial mortgage, they must be named in the suit if Party B files a foreclosure suit.
What is a Proper Party to a Judicial Sale?
The second category of parties to a judicial sale is a property party. A property party is a party that obtained an interest in the property before the execution of the mortgage.
A proper party is a party that may be helpful in a foreclosure process but is not essential to the lawsuit. A proper party is considered voluntary and cannot usually be named without their consent. They are normally not affected by the outcome of the lawsuit. Occasionally, the court may order a proper party to be named in a case if their input would be helpful for the judicial sale.
What Is the Judicial Foreclosure Timeline?
As previously noted, a judicial foreclosure is a court-ordered foreclosure. Although the foreclosure process varies from state to state, the general timeline is discussed below. Knowing the process is essential for a borrower to protect their rights during a foreclosure.
If the borrower misses a single payment, they will likely have a chance to make the missing payment and continue the mortgage. The loan officer might give them a call and remind them to make the payment. It is important to note that late fees may apply. Late fees can add up over time, making it harder for the homeowner to get out of debt.
The second missed payment is more serious than the first. The loan officer will likely call and request a payment be made immediately. Late fees will also likely apply.
The third missed payment is where the situation becomes serious. If a borrower misses three consecutive payments, the loan officer will send a notice of breach of the mortgage contract. The breach notice may state that the mortgage company is exercising its acceleration clause, meaning that for the borrower to keep the house, the remainder of the mortgage must be paid within 30 days.
If a borrower receives a notice of breach and cannot pay off the mortgage, the lender will begin foreclosure proceedings. A lawyer can help a borrower negotiate new payment terms earlier in the process, but this is where it is most important to obtain an attorney.
Next, the attorney for the mortgage company will begin the judicial foreclosure proceedings by filing a lawsuit. The borrower will have around 20 to 30 days to object in the form of a formal written response.
If the borrower does not formally object to the foreclosure proceedings, the court will enter an automatic default judgment against them. If the borrower objects, foreclosure proceedings will continue. Several procedural and substantive defenses may be available to the borrower.
Assuming defenses do not stop the foreclosure proceedings, the court next schedules a foreclosure auction. At the auction, the highest bidder on the property will become the new owner.
Depending on what state the property is located in, the borrower may have a right of redemption. If this option is available, the borrower will have a period following the auction to purchase the property back from the highest bidder.
If the borrower cannot exercise their right of redemption, they will be evicted from the property. The borrower will have a specified number of days to vacate the property; if they do not, they will be removed by law enforcement by force.
What Is a Deficiency Judgment?
Sometimes, the money recovered from a judicial foreclosure sale does not satisfy the mortgage amount. If that occurs, the lender may file for a deficiency judgment against the borrower to recover any back or missing payments. For example, if a lender of a $15,000 mortgage only received $10,000 from the judicial sale proceeds, they may sue the borrower for the remaining $5,000 owed on the mortgage.
Deficiency judgments are not permitted in every jurisdiction. Additionally, even permitted, they may be modified according to fair value legislation. In those cases, the mortgage lender will only be permitted to recover an amount based on the property’s fair value at the time of the sale, not at the time the mortgage agreement was signed.
Do I Need a Lawyer for Foreclosures and Judicial Sales?
Yes. If you are facing any foreclosure, judicial sale, or deficiency judgment issues, it is essential to have the help of an experienced foreclosure lawyer. Your attorney can review any documents related to your mortgage and ensure your interests are protected. A lawyer can also represent you during any court proceedings if necessary.