What is Foreclosure?
Foreclosure is the legal process by which the lender takes over your home and sells it to pay off your mortgage if you default. Foreclosure is not immediate. It is a step by step process that takes time.
Types of Foreclosure
There are two types of foreclosures – judicial and non-judicial foreclosure. Judicial foreclosure involves the participation of courts whereas in a non-judicial foreclosure, the lender takes possession of the house and sells it without court intervention.
Most foreclosures in California are non-judicial foreclosures. In a non-judicial foreclosure when you are in substantial default, the lender will record a notice of default in the county where your home is located. Before the lender can sell your home, the lender must send you a notice of foreclosure. This notice must be sent to you at least 20 days before the sale. You have until 5 days prior to the sale to pay off the arrears and prevent the foreclosure. The sale is by public auction held on any business day between 9 am and 5 pm. You can request the sale to be postponed by 1 day.
In a judicial foreclosure, the lender will file a foreclosure lawsuit against you. You will be named as the defendant in the lawsuit. Once the lawsuit is filed, you will receive a summons along with a copy of the lawsuit. The summons will specify the time period within which you must respond to the lawsuit. If you do not respond within the specified time period, a default judgment will be passed against you.
Generally lenders do not initiate foreclosure immediately on the first default. Most lender initiate foreclosure only after you are three or four payments in default. The foreclosure process starts with the lender filing the notice of default with the county recorder. The lender will mail you a notice of default within 10 business day of the filing. A month later (from the date of filing of the notice of default with the county recorder), the lender will mail another notice of default. After 3 months, the trustee will fix the sale date. 14 days before the sale date, the trustee will record the notice of trustee sale. You have until 5 days before the trustee sale to reinstate the mortgage and prevent the foreclosure. On the sale date, the property is sold to the highest bidder.
If you want to prevent foreclosure, you must be active. You must contact the lender immediately upon your first default. If you are having financial troubles, the lender can modify your mortgage payments or provide you with some breathing time – you don’t have to pay for a few months. If you feel you cannot pay off the mortgage in the long run, you can request the lender to agree to a short sale. In a short sale, the home is sold at the market value and the lender agrees to close the mortgage and not pursue you for the balance amount.
If the lender after initiating the foreclosure decides to withdraw the foreclosure process without prejudice after the homeowner negotiates with the lender, the lender must modify the mortgage. If the mortgage is not modified and the lender allows the homeowner to resume the monthly payments and in the event the homeowner defaults again, then the lender will not be allowed to foreclosure on the mortgage unless the lender has modified the mortgage and note.
If you are facing foreclosure, you must remember that time is running against you. Foreclosure is not an event. It takes place in stages. At every stage you have the opportunity to stop the foreclosure. There are many loan modification programs that you can avail of to modify your mortgage and make your monthly payments more affordable. Some of these programs have been started by the Federal government. Many lenders also have their own loan modification programs. Check to see if you qualify for these programs. Although the though of foreclosure is a frightening one, if you act in a timely manner, you can prevent foreclosure.
You can also prevent foreclosure by filing for bankruptcy protection. If you file under Chapter 7, you will most likely loose your home. If you want to keep your home, you should ideally file for bankruptcy under Chapter 13. If you include your mortgage in your payment plan and you make all the payments under the plan, then you can retain your home. Bankruptcy should only be used to prevent foreclosure as the last resort after all options have been exhausted.
The Process of a Court Ordered Sale
There are two types of foreclosure – judicial and non judicial. InCalifornia, most foreclosures are non judicial foreclosures. In a non judicial foreclosure, the lender can foreclose the house without court order. In a judicial foreclosure however, the lender must file an application in a court of law and get an order to foreclose from the court.
In a judicial foreclosure, the sale is conducted by public auction at the court house. The highest bidder gets the house. The lender can also bid at the auction. If the lender is the highest bidder, the lender gets the title to the house. The homeowner has one year to redeem the home i.e. the homeowner can buy back the home from the highest bidder within one year of the sale even if he or she has moved out of the home.
The new owner cannot evict you. You must be served with a 3 day notice to move out. If you do not move out within 3 days as specified in the notice, the new owner must file eviction proceedings to evict you. This can take weeks.
The biggest advantage of a judicial foreclosure from the point of view of the homeowner is that he or she can prevent the foreclosure and the subsequent court ordered sale by challenging the right of the lender to foreclose the home. With the lender files an application seeking an order to foreclose, you will be served with a copy of this application along with a summons or notice from the court asking you to respond to the application. You must respond within 30 days. If you do not respond within 30 days, the lender can get a default judgment against you. A default judgment is a judgment that is passed by the court against a party who has been served but has not filed any response or appeared within 30 days of the service.
A judicial foreclosure is also advantageous for the lender. In a non judicial foreclosure, where the home is sold by private sale i.e. not a court ordered sale, the lender will not have the right to obtain a deficiency judgment against the homeowner if the sale proceeds are less than the mortgage dues. However in case the court ordered sale does not recover the entire mortgage dues, the lender can apply for a deficiency judgment against the homeowner for the remaining mortgage debt.