Since most people use a mortgage to finance a home, they are required to make monthly interest and principal payments until the loan is paid off. But when a buyer is unable to make these payments, the lender has the option of foreclosing on the property. This essentially means that the lender can force the sale of the home in order to pay off the outstanding balance on the loan.

Foreclosure laws can vary from state to state and they depend primarily on whether your state uses a ‘power of sale' clause or not. A power of sale clause authorizes the lender to sell off the property in order to pay off the loan if the borrower defaults. This process is referred to as a nonjudicial foreclosure and it represents the vast majority of foreclosures.

A judicial foreclosure requires the lender to sue the borrower in state court. Obviously, this option tends to be more costly for the lender and borrower so it's not as common as non-judicial foreclosures.

Foreclosure Procedures by State

It's important to learn about your state's foreclosure laws since the rules and processes will vary greatly depending on whether your state uses a judicial or non-judicial foreclosure process. Currently, there are states that use judicial procedures in order to foreclose on a home and those that use a non-judicial foreclosure process since the buyer has given the lender a “Power of Sale” clause. Federal foreclosure laws don't apply in this case since the states are allowed to govern foreclosures themselves.

Judicial Foreclosure Process

The foreclosure process in a judicial foreclosure begins with an official court proceeding in which the lender must file a public complaint against the defaulting borrower. In the complaint, the lender usually includes the amount owed, the number of days in default, and any attempts that have been made to contact the buyer.

In a judicial foreclosure, the lender must ask for the court's permission to foreclose on the property.  Once the formal complaint has been filed, the homeowner will be served with an official notice of default. The homeowner will be given ample time to dispute the facts and provide evidence to the contrary but usually it doesn't get this far.

If the defendant is able to show a difference in facts, the court will move for an official trial. But since the facts are generally very straightforward, it's very uncommon for the process to go to trial. Instead, the court will usually issue a judgment in favor of the lender that includes all associated costs including total amount owed and any additional fees or costs.

Finally, the court will authorize a public sale(sheriff's auction) in which the loan is auctioned off to the highest bidder. If the maximum public bid does not exceed the amount owed, the property will revert back to the lender and become bank-owned or Real Estate Owned(REO).

Non-Judicial Foreclosure Process

Historically, judicial foreclosures don't often go to trial since it involves additional expenses for both parties. Due to that fact, non-judicial foreclosures have become more and more popular and a slight majority of US states now favor them.

They key distinction in a non-judicial foreclosure is that the lender is granted power of sale by the buyer so court intervention is not necessary. After 90 days of missed payments, the lender will notify the debtor and if the debt is not brought current within a certain time frame, the lender will offer a notice of sale.

With a notice of sale, the lender will notify public sources of an impending foreclosure sale and the property will be auctioned off to the highest bidder. Similarly to a sheriff's auction, if there is no bid higher than the outstanding balance on the loan, the creditor can take the property back and it becomes bank-owned.

How Foreclosure Laws Influence Foreclosure Sales

Foreclosure laws by state will vary but once the buyer is found in default(whether by power of sale or court order), the auction process is very similar. Judicial foreclosures require court involvement in order to prove the buyer has defaulted so they tend to be more costly and time-consuming.

Although foreclosure laws and procedures by state might cause certain foreclosures to be lengthier than others, the foreclosure process itself is basically the same. The timeline generally involves buyers missing payments, proof of missed payments, a sale being scheduled and then a redemption period.

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