Though no investor ever wants to think about the possibility of facing foreclosure, it does happen. If you ever find yourself with unmanageable mortgage debt, knowing your rights could mean the difference between reinstating your loan and getting evicted.
Here's a guide to the right of foreclosure.
What is the right of foreclosure?
In real estate, the right of foreclosure refers to a lender's ability to repossess a property through foreclosure proceedings if the mortgage holder defaults on monthly payments. Generally, state and local laws will regulate the conditions under which foreclosure proceedings can occur. However, investors and homeowners alike should know the mortgage they signed when buying the home will also detail the conditions under which the lender can take back possession of the property.
The right of foreclosure exists because signing a mortgage means you agree the property will serve as collateral for the loan. This means if you default on your mortgage payment for an extended period of time, the lender can access redemption rights and try to sell the property in order to receive repayment for the loan.
Once the lender has found a buyer for the foreclosed property, the former homeowner will find themselves facing eviction. Worse, if the new buyer does not pay enough to cover the former homeowner's debts, the homeowner could find themselves on the receiving end of a deficiency judgment.
Notably, while it's most common to see loan servicers exercise the right to foreclosure, they are not the only ones with the right to take foreclosure action against the property owner. In particular, homeowners associations (HOAs) also share this right if the homeowner does not keep current with their association dues or fulfill their obligation to pay any special assessments.
What are the different types of foreclosure?
Before getting into the nitty-gritty of foreclosure rights, it's important to understand the two different types of foreclosures. Traditionally, state law will dictate which type of foreclosure the loan servicer will use. However, some states allow both methods, so the servicer may be able to choose whichever method is more expedient for them.
As the name suggests, judicial foreclosure involves bringing a foreclosure case before the local circuit court.
In this process, the servicer typically must wait until the mortgagee is several months behind on their mortgage payment. Once the allowable time frame passes, the servicer must send the mortgagee a breach letter, which lets them know they are in default. The servicer must also allow the borrower a certain period of time to become current with their mortgage debt.
Once enough time has passed, the loan servicer must file a lawsuit in the county where the property is located. As part of the case, the servicer must request the court to allow the home to be sold in a foreclosure sale to pay off the debt. Typically, this is done by filing a petition for the court to issue a foreclosure judgment. If the mortgage lender is going after a deficiency judgment as well, it will also file that petition then.
In most cases, the court will side with the mortgage company, unless the homeowner has a defense that justifies their delinquent payments. Once the court has placed a final judgment against the mortgaged property, the mortgage lender can move forward with the foreclosure process, the process of trying to sell a home to the highest bidder.
A nonjudicial foreclosure proceeding does not involve the court. In this case, the mortgage lender includes what's known as a "power of sale" clause in the mortgage or deed of trust, giving the lender the power to foreclose on the property without court involvement.
However, similar to the judicial foreclosure process, before the mortgagor can move forward with foreclosure proceedings, it must provide the borrower with a breach letter, notifying the borrower of the fact they are behind on their payments. Usually, it must also provide the homeowner with an official notice of default, which states how long their redemption period is before foreclosure proceedings can begin.
Once the appropriate amount of time passes, if the borrower is still behind on mortgage payments, the mortgagor can schedule and advertise an auction for the property. When the auction takes place, the property will be sold to the highest bidder, and the former homeowner will face eviction.
When possible, lenders tend to prefer nonjudicial foreclosure. Typically, this process does not take as long as going through the courts, meaning they can recoup their losses faster.
What are the borrower's rights in foreclosure?
Now that you're well-versed on a lender's right of foreclosure, let's go over the rights of a borrower. While no one likes to think about the possibility of finding themselves in mortgage debt, the truth is knowing your rights can help the foreclosure process go as smoothly as possible and potentially help you to avoid eviction altogether.
With that in mind, here's what you need to know.
Right to loss mitigation
Loss mitigation is the official term for the process where you and the lender work together to avoid foreclosure. By law, your lender is required to contact you no less than 36 days after your first missed payment to offer loss mitigation services. Similarly, it must also contact you no later than 36 days after each subsequent missed payment with the same offer.
While the exact services the mortgagor offers will vary, usually you can expect to be offered a payment plan or potentially some sort of loan modification. In general, your lender will continue to offer you an opportunity to use these services until you are at least 120 days late on your mortgage payment.
Right to a breach letter
As mentioned, both the judicial and nonjudicial foreclosure processes include sending a breach letter. Officially, the breach letter is meant to notify you that you are in default on your loan. It must include the following information:
- A statement spelling out the fact you are in default because you have missed multiple mortgage payments.
- Instructions pertaining to what you need to do to cure the default and reinstate your loan.
- The date by which you must cure the default in order to avoid foreclosure proceedings.
- Notice of the fact that if you do not reinstate your loan, your loan servicer will be forced to take the next step in the foreclosure process.
The exact time frame may vary according to state and local laws. However, in general, since mortgage companies have to wait around 120 days before moving forward on a foreclosure, you can expect a breach letter to be sent out around 90 days after your first missed mortgage payment.
If you do not receive the right notices required by your state for foreclosure, you could have a defense against your loan servicer. While this doesn't necessarily mean you won't face eviction eventually, it does mean your loan servicer may have to start over and give you proper notice, giving you more time to work on paying off your debts.
Right to reinstate
In most cases, you'll have the right to reinstate your loan, which means you can stop the foreclosure proceedings if you make a lump-sum payment to become current on your loan by a certain date. But be aware: The amount you'll owe doesn't simply add up to the amount of your missed mortgage payments. You'll usually have late fees and other expenses to cover as well.
Sometimes your state law will allow this. Other times, you may have to contact the lender for this opportunity. If all else fails and you live in a judicial foreclosure state, you can ask the judge to give you the right to reinstate as part of your defense.
Right to redeem
Similarly, the right to redeem states you have the opportunity to pay off your debts and redeem your property before foreclosure takes place. Notably, all states allow for this right.
To invoke this, you must pay off your balance in full before the foreclosure sale takes place. However, in rare instances, you may also be able to reimburse the person who bought the property at the foreclosure sale to retake ownership of the property.
Right to foreclosure mediation
Some municipalities give homeowners facing foreclosure the right to foreclosure mediation, which involves meeting with the lender and an impartial, third-party mediator to discuss steps to avoid foreclosure. Typically, these steps will involve a repayment plan, loan modification, or a short sale.
Right to challenge the foreclosure
Homeowners in all states have the right to challenge their foreclosure in court. Usually, this is a good move if you believe the loan servicer made a mistake and you are current on your loan.
If you live in a judicial foreclosure state, this process is a bit simpler: All you have to do is focus on providing your own defense in the existing lawsuit. Those who live in a nonjudicial foreclosure state, however, have to file their own lawsuit if they wish to go this route.
Right to surplus
if the property sells at the foreclosure sale for more than you owe, including any fees, expenses, or liens on the property, the right to surplus says you are entitled to the excess proceeds. Of course, this is the flip side of a deficiency judgment, which says you are responsible for paying off any remaining debt if the foreclosure sale does not cover the total amount you owe.
The bottom line
There's no denying foreclosure is a complicated legal process. However, by taking the time to educate yourself on your rights and those of the loan servicer, you can give yourself the best chance of avoiding eviction altogether.
That said, if you have questions regarding the specifics of your situation, your best bet is to seek advice from a real estate attorney.