A foreclosure is the legal proceeding that occurs when a mortgage holder or other lien holder receives a court ordered termination or the mortgagor’s equitable right of redemption. A lender typically obtains a security interest from the borrower who pledges assets, like a house to secure their loan. If the borrower happens to default on the loan and the lender repossesses the property, the courts of equity can give the borrower the equitable right of redemption in the case that the borrower repays the debt. Even though the equitable right is present, a lender isn’t certain that it can repossess the property and therefore they foreclose the equitable right of redemption. Other lien holders can foreclose the owner’s right of redemption on other debts like unpaid or past due taxes, contractors’ bills and HOA dues or assessments.
When the owner of a residential property has failed to go along with the agreement made between the lender and borrower, called the “mortgage” or “deed of trust,” the foreclosure process is then applied if the bank of the secured creditor chooses to repossess the property. Typically, a default in payment or a promissory note is the common violation. The promissory note is secured by a lien on the property. After completion of the process, the lender may sell the property and keep the amount to pay off the mortgage and legal costs. The common terminology in this case is “the lender has foreclosed its mortgage or lien.” In the case that the promissory note is made with a recourse clause and the sale does not generate enough to pay the balance of principal and feels, the mortgagee can file for deficiency judgment.
The mortgage holder can initiate the foreclosure for a specific time in the actual mortgage documents, usually occurring after a certain period of time after the default. In the United States, along with several other countries, there is more than one type of foreclosure. Two of these, by judicial sale and power of sale are often used. Other types of foreclosure are possible in a few states. A foreclosure by a judicial sale or more commonly called a judicial foreclosure, is used in every state and required in many. This involves the sale of the property under a court’s supervision with the proceeds from the sale going to satisfy the mortgage first, then to the other lien holders and lastly to the borrower if there is anything left. Just like in every legal action, all parties must be privy to the foreclosure but the notification requirements differ from state to state. The judicial decision is given after pleadings during a hearing in a state or local court. It’s very rare but some foreclosure proceedings are done in Federal courts.
A foreclosure by power of sale is used in many states if a power of sale clause is included as part of the mortgage or if a deed of trust was used in the place of a mortgage. There are some states that use a deed of trust instead of a mortgage. In this process, a property is sold by the mortgage holder without the supervision of a court. In general, it’s a faster process than a foreclosure by judicial sale. Like a judicial sale, the mortgage holder and other lien holders are the first to receive proceeds from the sale.
Some other types of foreclosure are minor because they aren’t widely available. In a strict foreclosure, available in a few states like Connecticut, New Hampshire and Vermont, a suit is brought by the mortgagee. If it’s successful, a court orders the defaulted mortgager to pay the mortgage in a designated period of time. If the mortgagor does not, the mortgage holder receives the title to the property and has no requirement to sell it. This is typically done when the value of the property is less than the debt. In the past, this type of foreclosure was the only one available.