If you’re falling behind on your mortgage payments and are concerned about losing your home, your first step in avoiding foreclosure is to learn how the process works. State laws regarding foreclosure vary widely; however, the rules in “Deed of Trust” States give your lender two options when foreclosing on your loan. Here are the basics you need to understand about mortgage foreclosure.
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Deed of Trust vs. Mortgage
The difference between a Deed of Trust and a mortgage has to do with what happens if you default on your loan. If you default on your mortgage the lender must file in court to take your home when foreclosing. If you have a Deed of Trust instead of a mortgage, lenders are usually able to bypass the court when foreclosing. This makes the process less expensive and time consuming for the lender to complete. If you live in a “Deed of Trust” State your lender has the option of a judicial foreclosure (taking you to court) or using non-judicial foreclosure to sell your home.
There are currently fourteen states, including California, that rarely use “mortgages” to secure your home. Lenders typically prefer the Deed of Trust because foreclosure is less messy and expensive in these States. While a mortgage is a two-party agreement between you and your lender, a Deed of Trust involves a third party, known as the trustee. The trustee holds the title to your property and will initiate foreclosure if you default on the loan.
Non-judicial foreclosure involves a third party known as the trustee with the sale of your home. The trustee’s sale of y our home is less troublesome and expensive than judicial foreclosure because you cannot get your home back once the sale is final. The only advantage of non-judicial foreclosure for the homeowner is that if the sale of your home does not generate enough cash to cover your debt, the lender cannot come after you for any unpaid balance. This is why many lenders elect judicial foreclosure in Deed of Trust States even though it is a more difficult and expensive process.
Taking you to court to sell your home allows mortgage lenders to collect on your debt after your home is sold at auction. Judicial foreclosures can be messy for lenders because you have the option of redemption after the sale of your home. This means you could potentially pay off what is owed on your hand reclaim title even after the lender sells your home. Redemption rights including the amount of time you have to reclaim title vary by State but can last up to two years.
Judicial foreclosure allows your lender to sell your home at auction in order to settle your debt; however, you have the right to redeem your property…even after the sale. The down side of judicial foreclosure is that if the sale of your home is not enough to cover your debt the lender can still sue you for the difference.
Foreclosing on your home in most States is a four-step process that starts with the lender filing a notice of default with your County’s Recorder Office.
Step 1: Notice of Default
Your lender files the notice of default with your County Recorder and is then required to notify you by certified or registered mail within a certain number of days. After the notice of default is recorded by your County Recorder, all parties that have an interest in your home, like a second mortgage lender, also receive notification. If you have a lean on your home for property taxes the State will also be notified.
Step 2: Notice of Sale
If you do not make your loan current or complete other satisfactory arrangements with your lender, a Notice of Sale for your home will be published. If you have a Deed of Trust the trustee publishes a notice before the auction in your local newspaper. The notice is also posted on your home where it can be viewed by the public.
Step 3: Reinstatement Rights
Most States allow you the right of reinstatement before the sale of your home. In Oregon and California for example you have five days to exercise your reinstatement rights. Some states like Georgia have no reinstatement rights at all. Reinstatement involves more than just paying the past due amount on your loan; you will be responsible for paying all fees and charges associated with initiating the foreclosure of your home. If you bring your loan current but miss payments in the future the lender may restart the foreclosure process from the beginning. Remember, the right of reinstatement allows you to pay off the loan before your home is sold.
Step 4: The Auction and Right of Redemption
On the posted date and time your lender will sell your home at auction. After your home is sold the potential buyer receives a certificate of sale but does not yet get title to the property. If your home was sold by judicial foreclosure you still have a chance to get it back after the sale in most States. Remember that redemption is different than reinstatement; redemption occurs after the sale of your home and you must pay off the entire balance due. If your home is sold under the Deed of Trust, there is a clause in the contract allowing power of sale. Once the trustee sells your home you have no right to make a claim or take redemption. Furthermore, you do not have the right to bid on your own home during the auction.
This is the basics you need to understand about the foreclosure process. If you’re already going through this process refinancing your mortgage is probably not an option and you will have to make other arrangements. If you are considering refinancing to avoid foreclosure you can learn more about your options, including costly mistakes to avoid by registering for my free video toolkit. You can register with no obligation using the link at the top of this page.