What are the Types of Foreclosures?

Many homeowners and participants in the real estate industry have heard the term “foreclosure,” but not everyone knows what it means.

Essentially, a foreclosure may occur after a borrower defaults on loan (mortgage) repayments for a property. This results in the lender instigating and following the due legal processes to recover the amount owed by taking ownership of and selling the mortgaged property.

However, before resorting to foreclosure proceedings, it’s not uncommon for lenders to work with borrowers to bring payments up to date. Such an attempt avoids foreclosure and the associated costs and, perhaps, a capital loss on a subsequent sale.

Types of foreclosure

In the US, the actual foreclosure process varies by state. However, most states follow the procedures relating to two primary types of foreclosure: judicial foreclosures, and the other type of foreclosure is called a non-judicial foreclosures.

There is also a so-called strict foreclosure in some states, like Connecticut, Vermont, or Maine. Strict foreclosure offers a variation to the terms of a judicial foreclosure.

The fundamental difference between the types of foreclosure is that judicial foreclosures require a court order to be actioned. The mortgagee must attend court to prove that it owns the mortgage and has the right to foreclose on it.

A non-judicial foreclosure does not require a court order to be executed.

So, let’s have a closer look at the two primary types of foreclosure:

Judicial Foreclosures

Judicial foreclosure is allowed in all US states when the lender files a civil lawsuit against the borrower. The court handles the foreclosure process, and the lender needs the court to issue an order to foreclose on the property. This is all part of the Foreclosure proceeding. 

The judicial foreclosure process begins when the lender files a lawsuit and a lis pendens or Notice of Pendency of Action (“NPA”) on the property (e.g. AKA Notice of Default). The NPA is recorded with the County Recorder’s office to make potential buyers, lenders, and others aware of the pending foreclosure lawsuit.

Notice of Foreclosure Sale is subsequently filed once the court has set the auction date and minimum bid amount.

Debtors are given notice of the lawsuit and an opportunity to pay back the amount owed. Failure to pay in the specified time will result in an order from the court allowing the property to be sold to the highest bidder at a public auction.

These auctions are often referred to as sheriff sales as they are held by a representative of the county court or sheriff’s department.

A strict foreclosure requires lenders to secure approval from a court to recover property so that they can put it up for sale. However, this will usually only be granted if the property is worth less than the mortgage balance.

The court will set a date by which the debtor must pay the mortgage payment arrears but, if this does not happen, will award ownership of the home to the lender without the need for an auction.

Non-judicial Foreclosures

The non-judicial foreclosure process allows a lender to advertise and sell a property at public auction, without court involvement, by following a method specified by state laws or statutes.

When the mortgage was granted, typically, a power of sale clause would have been added to a mortgage giving the third party the right to sell the property if the borrower fails to make their repayments.

Given the above points, non-judicial foreclosures are sometimes called statutory foreclosures or foreclosure by power of sale.

In non-judicial foreclosures, homeowners only have a relatively small window of time to pay unpaid mortgage payments to keep their homes.