Foreclosure Process: How State Laws Vary
Foreclosure is not a universal, single situation. Each state has its own complex rules and timelines for how foreclosures are handled, and even within each state there may be more than one type of foreclosure. You need to know the steps of foreclosure, whether your state has judicial or non-judicial foreclosures, your state’s quirks, and any possible loopholes.
Know the steps of foreclosure
Although there are variations, your foreclosure will go through five stages, which gives you some time to adjust to the idea that you need to leave your house and take steps to ensure as smooth a transition as possible:
1. Payment default. Your agreement with your lender will stipulate how many missed payments put you in default.
2. Notice of default. Your lender sends this after a fixed amount of time, depending on your mortgage agreement. According to Wayne Greenwald, a New York-based attorney, this is when you must aggressively pursue ways to fend off the worst outcome. In New York, for example, you have the right to contest the foreclosure. Start by demanding to see the paperwork. Since so many mortgages are repeatedly sold, every so often the actual paperwork gets lost in the shuffle, and you’ll reap the benefits: your foreclosure will be delayed until it’s found.
3. Property put up for auction. Property that has been foreclosed is placed for public auction. In some states, you may have rights for redemption or reinstatement, which basically give you some final opportunities to reach an agreement with the lender.
4. Property sold at auction. If the auction fails to find a buyer, the bank will take ownership and attempt to sell property, often with a real estate agent’s assistance.
5. Eviction. You’ll receive eviction notice, advising you to vacate premises immediately.
Understand judicial vs. non-judicial foreclosures
When you bought your house, you were handed piles of pages in fine print you almost certainly didn’t read. Foreclosure is where these pages come into play! You need to understand some terms before you can understand your foreclosure:
- A mortgage is actually not the loan you received, but a document that was issued at closing. It is an agreement between you and the bank that is lending you the money.
- A deed of trust serves the same purpose as a mortgage, but it involves three parties: you, the bank, and a trustee that holds the title until you’ve paid off the loan. This trustee is typically a title company, but in some places it can also be an attorney.
You probably don’t remember choosing one over the other—because you didn’t. Your state’s law determined which instrument would be used. And in fact, for the average homeowner, there’s virtually no difference between the two. However, these instruments affect the kind of foreclosure you will likely face:
- Judicial foreclosure. Typical in mortgage states, it requires the lender to go to court to proceed with foreclosure.
- Non-judicial foreclosure. Typical in deed of trust states, the trustee can usually proceed with foreclosure without involving the courts.
Many states allow both judicial and non-judicial foreclosures, depending on specific terms in the loan documents. Non-judicial foreclosures are usually—but by no means always—quicker than judicial foreclosures.
Learn your state’s quirks
Each state has its own specific ways of handling foreclosures—you can’t even assume that all judicial or non-judicial states will be the same.
If you live in Georgia, for example, you will probably go through a non-judicial foreclosure. The lender will attempt to notify you that foreclosure is imminent, and then place a “notice of foreclosure” in the local legal newspaper for four consecutive weeks. After that, the lender’s attorney can sell your home to the highest cash bidder. Lenders on Georgia homes can often complete the repossession process in as little as six weeks.
On the other hand, if you live in Connecticut, you will definitely proceed through a judicial foreclosure. The judge presiding over the case has the option to grant either a “strict foreclosure,” where the deed is forfeited immediately, or a “foreclosure by sale.” Your lender must send you a letter at least 60 days before the foreclosure action, after which time the foreclosure can begin, typically taking up to four months.
Compare that state to New York: It’s also a judicial-only state—but the process typically takes more than a year.
Review the loopholes
Although nothing replaces professional help, researching your state’s rules is a good place to start. Even beyond the usual regulations, some states have recently created special rules to ease borrowers through the foreclosure process. Qualified local help can help you with such programs as:
- Maine’s borrower-friendly foreclosure diversion program. It creates stays of proceedings and requires lenders to participate in good-faith foreclosure discussions. Lenders who don’t participate can find their lawsuits dismissed.
- New York’s new rules that add loans secured by borrowers’ homes in its mandatory settlement conference law, essentially requiring lenders to meet with borrowers to discuss settlement.
The more you understand your state’s laws, the more likely you will be able to move through your foreclosure process with a minimum of bumps—or even avoid it altogether.
Barbara Eisner Bayer has written about mortgages and personal finance for the past 16 years for the Motley Fool, the Daily Plan-It, and Nursevillage.com, and has been the Managing Editor for CompleteGrowth.com. Mortgageloan.com, and Credit-land.com. She’s grateful that she now knows where to turn if she ever struggles to meet her mortgage payment.