Equitable Right of Redemption
In most states, the debtor may redeem (save) the property from foreclosure beginning at the time the foreclosure action is brought until the final foreclosure sale by making full payment to the court of the amount owed, including court costs and fees. In other states, this right of redemption is restricted to a specified time frame, depending on the type of instrument used and whether it uses non-judicial or judicial foreclosure.
This right is especially important in light of life events that are outside the control of the debtor. Often a debtor may overcome the life event and be able to once again establish a mortgage with the current lender or another lender, including private lenders.
Many times the original lender will try to avoid taking back the property through loan workout solutions prior to starting the foreclosure process.
Loan Workout Solutions
Let’s take a look at each one.
The restoration of a mortgage or deed of trust to good standing after payments are made to remedy the default
Under reinstatement the lender will accept full payment of the amount owed as of a specified date. In some cases the debtor may be able to bring current the amount due. If this occurs, the lender is willing to “reinstate” the mortgage under the original terms.
Often it is a friend or family member who assists the debtor by virtue of a loan. In many cases this allows for the debtor to resume normal payments and remain current. Other times this will simply forestall foreclosure.
A property may fall into and out of default multiple times before finally going into foreclosure and being sold at auction.
Refraining from taking legal action on a mortgage that is in arrears; usually granted when the mortgagor makes a satisfactory arrangement to pay the arrears at a future date
The lender agrees to take no action until a future date. This may be due to a future planned sale or some other reasonable action taken by the debtor to bring the loan current or to pay off the entire loan.
Forbearance and reinstatement tend to go hand-in-hand. The lender is willing to reinstate the loan, but must have reasonable assurance of the time frame. Often either or both of these will have an accompanying appraisal, since the lender is taking an increased risk.
Under a repayment plan, the debtor resumes normal payments with the addition of partial payments of the past due amount until the debtor comes current. This type of plan is often used when just a few payments are missed due to a life event. This type of plan must be agreed to by all parties in the transaction.
The lender may be willing to change one or more of the terms of the loan. This could include:
- Reduced interest rate
- Conversion of a variable to a fixed rate
- Extending the term of the loan and adding the payments to the back of the loan
- Change in terms (time and interest)
If the loan is insured, the insured (debtor) may qualify for an interest-free loan in order to bring the loan current.
Repayment of this loan may be delayed several years or not occur at all until after a subsequent sale of the property.
Pre-Foreclosure or Short Sale
In a short sale, the lender may accept less than the full amount owed if the sale price of the property does not cover the amount owed.
Most often this will require the services of a professional appraiser and a professional broker/agent or auctioneer.
There must be clear evidence that the property at sale will not yield enough to cover the amount owed. Often this is done in areas where market conditions have changed dramatically (e.g., a plant closing). Usually it would require a solid contract after exposure to the open market that clearly indicates that the property will bring no higher value regardless of any action by any party.
The lender will normally agree to a specific amount of time to sell the property for the full amount owed or more. Most lenders would require a professional broker/agent or auctioneer to conduct the sale. Normally, this would require an appraisal prior to, or in conjunction with, the listing. It may also include Forbearance as part of the sale timeline.
The lender may agree to having a qualified new borrower assume the existing loan, regardless of whether the original loan allowed for this provision or not. The terms may require the new borrower to bring the existing loan current and most often will require a professional appraiser.
The lender may agree to the voluntary “give back” of the property and forgive the debt. Normally, this would require an aggressive attempt to sell the property for a specified time and will usually require the services of a professional appraiser.
This option is not available if there are:
- Other lien holders
- Judgments by other creditors
- Other second mortgages
- Tax liens
United States foreclosure laws.
Select a state from the map or the list below for complete state foreclosure information. Each state foreclosure page includes a summary of your state foreclosure law as well as links to other foreclosure law resources.
Two Types of Foreclosure: Judicial and Non-Judicial
The basic difference between the two types of foreclosure is a lawsuit called a foreclosure action. We will look at the non-judicial process first, and then the more complex and more common, judicial foreclosure process.
In some states both the judicial and non-judicial foreclosure processes are in place. Which type is used is dependent on the instrument that was used to create the mortgage.
Non-Judicial (no court action required)
The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of their default.
This form of foreclosure is usually found in trust deeds.
A legal instrument similar to a mortgage which, when executed and delivered, conveys or transfers property title to a trustee.
A three party security instrument conveying the legal title to real property as security for the repayment of a loan. The three parties included in a deed of trust are the borrower, lender, and trustee.
In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or the lender's representative, typically referred to as the trustee. Regulations for this type of foreclosure process are outlined in the "Power of Sale Foreclosure Guidelines” established by state laws.
The following is from California State law regarding non- judicial foreclosure from www.foreclosurelaw.org:
Power of Sale Foreclosure Guidelines
If the deed of trust or mortgage contains a power of sale clause and specifies the time, place, and terms of sale, then the specified procedure must be followed. Otherwise, the non-judicial power of sale foreclosure is carried out as follows:
A notice of sale must be: 1) recorded in the county where the property is located at least fourteen (14) days prior to the sale; 2) mailed by certified mail, return receipt requested, to the borrower at least twenty (20) days before the sale; 3) posted on the property itself at least twenty (20) days before the sale; and 4) posted in one (1) public place in the county where the property is to be sold.
The notice of sale must contain the time and location of the foreclosure sale, as well as the property address; the trustee's name, address, and phone number; and a statement that the property will be sold at auction.
The borrower has until five (5) days before the foreclosure sale to cure the default and stop the process.
The sale may be held on any business day between the hours of 9:00 am and 5:00 pm and must take place at the location specified in the notice of sale. The trustee may require proof of the bidders ability to pay their full bid amount. Anyone may bid at the sale, which must be made at public auction to the highest bidder. If necessary, the sale may be postponed by announcement at the time and location of the original foreclosure sale.
Lenders may not seek a deficiency judgment after a non-judicial foreclosure sale and the borrower has no rights of redemption.
In California, there is no right of redemption in this type of foreclosure. However, each state has specific rules governing these types of action. Appraisers are advised to understand what is possible in their state.
The implied advantage of the non-judicial foreclosure is that it does not require the cost of time, effort, and money to file a lawsuit. It is usually true that the process takes much less time than a judicial foreclosure.
In Judicial foreclosure the instrument that creates a lien against the property is the mortgage. The lien is used as security against the property for payment of the loan. The borrower pledges the property to the lender as collateral for the debt. Under this form of foreclosure, a court must order the sale of the property after a lawsuit called a foreclosure action is filed and the court determines that the lender is rightfully owed the debt. If it is determined that the debt is owed, the court will issue an order of execution and direct the proper office of the court to seize and sell the property. The sale occurs after several appraisals are ordered, for a specified percentage of that appraised value, usually at auction, on a specified date, at a specified place, to the highest bidder.
The minimum bid is established by the appraisals to protect the borrower from the loss of any equity buildup by preventing the lender from simply bidding the amount of the mortgage balance.
Acceleration Clause activated
Acceleration Notice issued
Foreclosure Action (lawsuit in judicial action states)
Order of Execution
Appraisals set value
Public Auction at a percentage of the appraised value
Confirmation of Sale
Sheriff’s Deed issued
Ohio Judicial Foreclosure (from www.foreclosurelaw.org )
Generally, in judicial foreclosure, a court decrees the amount of the borrower’s debt and gives him or her a short time to pay. If the borrower fails to pay within that time, the clerk of the court then advertises the property for sale.
At some point prior to the scheduled date of foreclosure, three disinterested freeholders of the county must make an appraisal of the property. A copy of the appraised value must be filed with the court clerk and the property must be offered for sale at a price of not less than two-thirds of said value.
The sale may not take place until the notice of sale has been published once a week for three (3) consecutive weeks in a newspaper of general circulation in the county in which the property is located. The sheriff will conduct the sale at the courthouse and the property will be sold to the highest bidder.
Lenders may obtain a deficiency judgment and the borrower may redeem the property at any time before the court confirms the foreclosure sale by paying the amount of the judgment, plus costs and interest.
A deficiency judgment is a separate legal action used if the sale of the property does not cover the amount of the debt. This is a judgment whereby the borrower is still liable for the balance due after the foreclosure sale. It is not often used, since it may require a separate legal action and often there is nothing to attach because the borrower has lost everything.
Again, this is different in various states. Some states may allow a separate court action, while others may include it in the original court proceedings.
The property is sold at auction to the highest bidder. Normally the lender will bid up to the amount of the mortgage, including other costs incurred. Normally the highest bidder is the lender. This is done to protect their interest. If a bid received is higher than the amount owed the lender, the lender may let the sale go forward.
After the sale, the proceeds are used to pay all liens, taxes, expenses, and other related costs. Any proceeds left over are paid to the borrower.
After the sale, a document called a confirmation of sale is filed and normally a sheriff’s deed is issued.