Archive for year: 2024

When homeowners stop meeting their repayment obligations, mortgage lenders can initiate the process of foreclosure to recoup the losses that they’ve incurred. At the end of this process, the home is typically sold at a sheriff’s sale auction, with the proceeds going to the lender.

Sometimes, the amount that the home is sold for is less than what the borrower owed on this mortgage. If this happens, it creates what’s called a deficiency.

In some states, mortgage lenders are able to go after the borrower personally to cover this deficiency. However, anti-deficiency laws are in place in other states that prohibit or limit a residential mortgage lender’s right to recover this discrepancy from the borrower.

In certain situations, these anti-deficiency laws can protect borrowers from facing deficiency judgments, which can be extremely detrimental to their finances. 

Just like most other foreclosure rules, anti-deficiency laws are set on a state-by-state basis, with much variation, specific requirements and possible exceptions.

Deficiency Judgment: What Borrowers Need to Know

In states that allow it, mortgage lenders are able to file a civil lawsuit against a borrower to seek the difference between what the home was sold for at auction and the remaining outstanding balance on the mortgage. The lender obtains this through what’s known as a deficiency judgment, which is an official court order that requires the borrower to pay any remaining debt following a foreclosure sale.

As mentioned, what options a borrower may have to avoid a deficiency judgment depends on the state in which the home is located. In some states, borrowers can avoid a deficiency judgment by deeding their property to the lender before the process of foreclosure begins.

If you’re facing foreclosure, it’s extremely important that you know your rights as well as the rules and regulations regarding the process in your state. Because these laws can be complex and complicated, you should always consult with an experienced foreclosure lawyer to understand your options.

How Anti-Deficiency Laws Work

Anti-deficiency laws are official statutes that are on the legal books of individual states. These laws were designed to protect borrowers from facing a huge mountain of debt even after they lost a home to the foreclosure process.

These laws usually apply to purchase money loans, or mortgages, which are loans that are used specifically to purchase real estate. In some cases, refinance loans might be protected from deficiency judgments if they’re secured by a purchase money security device.

While anti-deficiency laws can vary greatly in detail from one state to the next, generally speaking, they don’t apply to vacant land or commercial properties. This means that the borrower in both of these cases wouldn’t be protected from a deficiency judgment following foreclosure. 

Many states also require that the property in question be a borrower’s primary residence for it to receive protection under anti-deficiency laws.

State-Specific Anti-Deficiency Laws

In total, there are 16 states that have anti-deficiency laws on the books. They are Wisconsin, Washington, Oregon, North Dakota, North Carolina, New Mexico, Nevada, Montana, Minnesota, Iowa, Idaho, Hawaii, Connecticut, California, Arizona and Alaska.

It is important to note, though, that some of the states on this list also include limitations and/or exceptions. 

In California, for example, the anti-deficiency law only applies to a residential property that’s used as a primary residence and that has no more than four units. It also only applies to purchase money mortgages.

The anti-deficiency law on the books in Arizona protects certain types of properties, as long as they have a purchase money mortgage. The home must be either a single-family home or a single two-family home. In addition, the home must be on 2.5 acres or less. 

Each state that has anti-deficiency laws has its own specific rules, regulations, limitations and exceptions. That’s why it’s important to educate yourself about the specific laws that apply to where you live.

Limitations and Exceptions

In addition to exceptions and limitations on the type of property, many states’ anti-deficiency laws don’t apply to certain types of loan.

Home equity lines of credit or home improvement loans may not fall under the umbrella of covered debt for anti-deficiency laws. In some states, there are also exceptions in place for loans that cover multiple properties, or for properties that have multiple liens on them.

In all of these cases, the mortgage lender, or lenders, may have the right to seek a deficiency judgment against you if your property and/or your specific loan type isn’t covered under your state’s anti-deficiency law.

Knowing whether your property is or is not covered is important if you’re facing foreclosure, because it might steer you in one direction or the next when you’re weighing your options.

Avoiding Unpaid Debt After Foreclosure

There are, of course, many concerns homeowners who are facing foreclosure have. In addition to losing your home and having to find another place to live, you must deal with the fact that your credit is likely to take a significant hit for an extended period of time if your home is sold through a foreclosure process.

In addition to that, if the current fair market value for the home is a lot less than what you owe on the mortgage, you could be on the hook for a significant amount of debt, depending on what state you live in.

If your state does not have anti-deficiency laws, you may have options to avoid a deficiency judgment. If you know that your home is likely to sell for less at auction than what you owe on the mortgage, you could do what’s called a deed-in-lieu of foreclosure.

Essentially, this is an arrangement struck between you and your mortgage lender where you will sign the deed of your property back to the lender before they foreclose on it.

In this case, you will be giving up your rights in the property in exchange for the lender not foreclosing on you.

Some borrowers may enjoy major advantages if their lender will agree to this.

For one, you’ll be released from all the debt you owe in the home immediately, without the huge hit on your credit. You’ll also not have to face public notoriety that goes along with foreclosure, since most states require the lender to advertise the date and location of all sheriff’s sales.

It’s also a way to avoid being potentially responsible for a mound of additional debt if the lender seeks a deficiency judgment against you.

Lenders do not have to agree to a deed-in-lieu of foreclosure, though, and it may take some negotiating to get it done. That’s why you should consult with a foreclosure lawyer who can present you the best options to avoid being responsible for unpaid debt.

Know Your Rights When It Comes to Foreclosure and Deficiency Judgments

Borrowers who are facing foreclosure need to be well-educated on all aspects of the proceedings. Unfortunately, there is no across-the-board standard for foreclosures, as the process varies greatly from one state to the next.

Understanding what these rules are, and whether anti-deficiency laws apply to you, are important because it can help protect you in a foreclosure situation.

If you’re facing foreclosure, it’s essential to consult with an experienced and qualified foreclosure lawyer so you can know all of your rights and options under applicable state law.

Equitable subrogation is a common legal practice that’s carried out in the real estate and insurance sectors a lot. The legal doctrine allows one party to replace another party, asserting the remedies and rights of that other party in the process.

In real estate, equitable subrogation is often put into practice when a borrower refinances their mortgage. In this case, the new lender will extend credit to the borrower that acts as the new mortgage.

To assume the position of first priority lien holder on the property, the new lender will pay the original lender the amount of money that’s owed on that loan. Through the doctrine of equitable subrogation, this will relieve the original lender of its lien holder rights, giving them to the new lender.

Equitable subrogation also differs from traditional subrogation. That’s because instead of the remedy being contractual, it’s equitable — meaning one debt is replaced by another.

Below, we’ll discuss equitable subrogation in more depth, including how it pertains to foreclosure and how you can protect your assets in the process.

The Role of the Insurance Company in Equitable Subrogation

Insurance companies exercise subrogation rights quite often, specifically when they are settling claims. Insurance companies have the right to exercise subrogation rights so they can gain reimbursement for payments that are made to policyholders.

An example would be if a driver got into an accident that wasn’t their fault and was injured in the process. That driver’s insurance company might be contractually obligated to provide coverage for the driver, helping them to pay medical bills associated with their injury — in addition to the amount they have to pay for any damage done to the car.

The money that the insurance company has to pay is considered their loss. Through equitable subrogation, the insurance company might have the right to reclaim that loss from the other driver’s insurance company — since that person was at fault for the accident.

Of course, this example doesn’t apply to all cases across the board. Some states are considered no-fault states for auto accidents, which essentially wipes out the ability of insurance companies to exercise equitable subrogation in this way.

Policyholders may also be affected by the insurance company exercising subrogation rights, as it could impact their own interests in a property.

Equitable Subrogation in Foreclosure Cases

Equitable subrogation can also come into play in real estate in some foreclosure cases where there are multiple lien holders on a single property, and it can have large ramifications on distribution once a foreclosure sale has been completed.

Sometimes, a senior lender will pay off a junior mortgage on the property, and then seek to be subrogated to the position of the junior mortgage. This would allow them to pursue a claim on the outstanding balance owed by the borrower and, ultimately, try to foreclose on the property to obtain its money.

By pursuing equitable subrogation, lenders can seek to obtain reimbursement for payments they made on the outstanding debt. 

At the same time, borrowers typically have options and rights to negotiate with lenders to avoid the foreclosure process altogether. However, this can be a complicated process.

That’s why if you’re facing the possibility of foreclosure, it’s important to have an experienced attorney on your side.

Proving Negligence of a Third Party

Equitable subrogation is meant to be a fair process, hence the name “equitable.” It’s possible, though, that one party may try to prove negligence by a third party.

The rules of how this must be done vary by state. Generally speaking, though, one has to show that a third party was responsible for the loss, which could include demonstrating clearly that they were primarily liable for whatever the loss was.

The party claiming negligence will have to back up their claims with proof by providing documentation such as insurance policies, contracts or other records that show the third party holds liability.

Understanding Subrogation Clauses in Insurance Contracts

Many insurance contracts will have subrogation clauses written right into them. These provisions will give the insurance company the right to pursue claims against third parties.

In essence, these clauses enable the insurer to get a reimbursement for any payments they must make to policyholders, if a third party was responsible for that loss — as mentioned in the example above.

These clauses can impact equitable subrogation, in that they can ultimately limit the insurance company’s right to pursue a claim against a third party. They could also affect the rights of both the third parties and policyholders alike.

Defenses and Waivers of Subrogation

It’s also common that defendants argue that equitable subrogation clauses cannot, or should not, be enforced in their case. There are many different angles they may take to defend their position.

One is that there was a lack of consideration given to their own claims, or that there isn’t a clear or direct relationship between the parties in the case. They also might argue that the subrogation clause is either unenforceable or ambiguous.

Again, depending on the state and how the subrogation clauses are written, it’s possible that defendants could be successful in this vein, if the insurer didn’t meet certain standards or requirements.

Waivers of subrogation could also affect the rights of equitable subrogation by limiting the ability of an insurance company to pursue a claim. In other words, there could be a limit to how much money, or a percentage, of the loss they are allowed to pursue using equitable subrogation.

Legal Framework for Equitable Subrogation

Case law in Florida has established the requirements for equitable subrogation. It has been established through the state court system as a fair remedy that ensures no lender is injured when they lend money to either businesses or individuals.

Equitable distribution has been used in Florida for disputes over real estate, in Land Bank of Columbia v. Godwin; over insurance; and over construction, in See Tank Tech, Inc. v. valley Tank Testing, LLC.

Florida’s legal framework for cases involving equitable subrogation could also impact other cases’ outcomes that involve both insurance and foreclosure claims. They could also affect the options and rights that insurance companies, lenders and homeowners have.

Seeking Professional Help

Equitable subrogation is certainly not a simple concept. Not only is it complex, but it can be up to interpretation.

That’s why if you’re facing foreclosure and/or an equitable subrogation case, it’s important that you consult with an attorney who has years of experience in these fields. This attorney can help you navigate the complex legal issues that are involved in cases with equitable subrogation.

Lenders, homeowners and policyholders all have options and rights in equitable subrogation cases, which an attorney can help guide you on. They’re also experienced in negotiating these claims with insurance companies or pursuing claims against third parties.

Common Misconceptions

There are many common misconceptions involving equitable subrogation.

One is that it’s the same as conventional subrogation. A main difference between the two is that equitable subrogation as a remedy for a particular debt can’t be legally enforced but should be recognized. 

Another common misconception is that waivers of subrogation always are enforceable. Depending on how the waiver clause is written, and what state it applies to, it’s possible that it may not be enforceable, providing a loophole for defendants.

Frequently Asked Questions about the Process

What is the difference between equitable subrogation and conventional subrogation?

Equitable subrogation is referred to as legal subrogation, while conventional is referred to as contractual subrogation. The latter is based upon a contract between two parties, while the former doesn’t require such an agreement.

How does equitable subrogation affect policyholders and third parties?

Equitable subrogation could allow an insurance company to “step into the shoes of the policyholder,” assuming their rights in the process. Third parties may also have to pay compensation to cover losses an insurance company incurs.

What are the requirements for proving a case of equitable subrogation?

There are five conditions an equitable subrogation case must meet. The subrogee must be paid the full debt, the subrogee has to pay the original claimholder so their own interests are protected, the subrogee can’t act as a volunteer, the subrogation can’t harm any third parties’ rights, and the subrogee can’t be primarily liable for the debt in question.

Get Legal Help if You’re Facing Foreclosure

Equitable subrogation is a legal doctrine allowing a party to “step into the shoes” of another party so they can assert remedies and rights of that other party. Unlike conventional subrogation, it’s not based on a contract, and can arise at times in foreclosure cases.

Since equitable subrogation is such a nuanced and complex legal concept, careful consideration is required for the options and rights of all the parties involved. That’s why if you find yourself in such a case, it’s important to consult with an attorney who is experienced in foreclosure law and equitable subrogation.

Doing so will ensure that your rights and options are protected, and that you know how to navigate equitable subrogation in foreclosure cases.

When the financial crisis hit in 2008, thousands of homeowners across the country suddenly found themselves in a precarious position. The homes they owned all of sudden were worth less than how much they owed on their mortgage.

Combined with mass layoffs that occurred at companies all over, many of these underwater homeowners couldn’t afford to pay their monthly mortgage and were facing foreclosure. 

In response to the building crisis, the Federal Housing Finance Agency created a government-backed refinance program in 2009 called the Home Affordable Refinance Program. 

HARP, which was sometimes referred to as the Obama Refinance Program or the Obama Mortgage, was designed to help underwater homeowners refinance the mortgages they had — sometimes at lower interest rates.

While the HARP program ended at the end of 2018, borrowers still have options to refinance their mortgages if they find themselves underwater on their homes.

HARP Eligibility and Requirements

The HARP program was available only for homeowners that had mortgages that either Fannie Mae or Freddie Mac guaranteed. To qualify for the program, then, homeowners had to have a mortgage from either entity in place before May 31 of 2009.

The government’s goal with the program was to slow down the rate at which mortgages were being foreclosed on, while also helping homeowners who found themselves victims of subprime lending practices.

In addition to having these two types of mortgages, borrowers had to be up-to-date on their mortgage repayments, and the property also had to be in a good condition. Any borrower who vacated their property or had defaulted on their mortgage couldn’t qualify for a HARP refinance.

There were other requirements that borrowers had to meet in order to be eligible for HARP, including the fact that the loan-to-value ratio (LTV) needed to be 80% or more. 

Homeowners with either a first or second mortgage were able to qualify for the program.

Benefits of a HARP Refinance

There were a few different benefits of HARP refinance, all of which provided both short- and long-term advantages. This included lower interest rates, which in turn resulted in a new lower monthly payment.

It also allowed borrowers to convert their loan from an adjustable rate to a fixed rate, which provided long-term cost certainty and, as a result, financial stability. A HARP refinance sometimes even allowed borrowers to shorten the repayment term of their mortgage, from 30 years to 15 years, for example.

The FHFA released a report in March of 2019 that said almost 3.5 million borrowers refinanced using the HARP program, which shows just how popular and beneficial it was.

How to Apply for a HARP Loan

There were a few options that borrowers had to apply for a HARP loan. They could either work with a lender or mortgage broker, and while not all mortgage services participated in the program, most did.

One of the nice parts about the program was that borrowers didn’t need to refinance through the same lender who originated the original mortgage. This gave borrowers plenty of choice in refinancing.

Much like applying for an initial mortgage, lenders required borrowers to provide a lot of information to apply. This includes proof that they fit the parameters of the program, as described above.

To do this, borrowers needed to provide proof of income, have a credit check run and have an appraisal done on the home, which often also included a general inspection to ensure the property was in good condition.

Once the lender had that information in hand, they could process the application and start the underwriting process. When the process was complete, the result was a new mortgage with new terms that defined how much the borrower owed, what the new interest rate and length of the loan were, and what the resulting monthly payments were as well.

HARP Replacement Programs

Once the HARP program came to an end in 2018, both Freddie Mac and Fannie Mae launched new programs intended to help homeowners who had a high LTV ratio getting better terms on their loans. 

The two programs were called the Freddie Mac Enhanced Relief Refinance Mortgage and the Fannie Mae high-LTV refinance option, or HIRO. Both of the programs are similar in terms of their eligibility requirements, though each program has its own rules.

Which program homeowners can apply for depends on which of the agencies owns the loan on your home. There are many benefits of this program, first and foremost the fact that they are designed to help homeowners who have little to no equity in their home gain more favorable loan terms.

High-LTV Refinance Options

The two main high-LTV refinance options start with the LTV on your home to figure out whether you qualify.

The Fannie Mae HIRO plan, for instance, requires that your LTV ratio be as high as 95% for a variable-rate loan or 97% for a loan with a fixed rate. In either case, the dwelling must be a single-family home, and it must be the borrower’s primary residence.

The Freddie Mac program is available for loans that have LTV ratios as high as 95%. It’s a program that supplements the agency’s cash out refinance option. The maximum amount for a mortgage with a variable rate is an LTV ratio of 105%, though there’s no maximum ratio if you have a fixed-rate mortgage.

Both programs require a full appraisal of your home to confirm what the LTV ratio will be, since that ratio is calculated by comparing the value of your home to your total outstanding mortgage amount.

There are instances where your loan application might be able to be underwritten electronically, in which case you could potentially qualify for an appraisal waiver. If this happens, you will save money on closing costs, since the full appraisal won’t be needed.

There are some things about the new mortgage that results from these two programs that you should be aware of. While the programs are designed to give homeowners financial relief, they might require you to pay monthly private mortgage insurance, or PMI.

This monthly payment is in addition to your principal, interest, property taxes and insurance, and PMI can sometimes get expensive. In addition, PMI often does not go away for the life of the mortgage, meaning it’s a long-term, ongoing additional expense.

Refinancing with HARP

When it existed, HARP was a great program the federal government put in place to help homeowners who had underwater mortgages due to the financial crisis of 2008. In addition to potentially lowering the interest rates on the mortgage, HARP helped give some homeowners more favorable overall loan terms.

Now that HARP has ended, there are still refinance programs available to help struggling homeowners who find themselves with high LTV ratios. The Fannie Mae and Freddie Mac programs are two good ones, but can only be used if your mortgage is owned by one of these federal agencies.

Refinance options are available for other federally-backed mortgages, such as VA loans, FHA loans and USDA loans. All of these programs can help borrowers lock in a lower rate, which helps to reduce the monthly payment for the long run.

Explore Your Refinance Options if Your Mortgage is Underwater

The Home Affordable Refinance Program may no longer be available, but it served as the blueprint for many of the home refinance programs that are around today. This includes two programs offered by Freddie Mac and Fannie Mae, as well as others offered by the VA, USDA and FHA.

If you have a conventional mortgage through a private lender that’s not backed by a government agency, you may have options as well.

If you find yourself with an underwater mortgage with a high LTV ratio, it’s important to contact your mortgage servicer as soon as possible to figure out your options. Doing so before you fall behind on your mortgage payments is crucial if you want to qualify for some of the programs that are available.

Refinancing can be a great option for homeowners who are struggling to make their mortgage payments, as it can result in a lower interest rate and better overall terms.

When you signed a mortgage to fund the purchase of your home, you signed a contract with a lender. The lender provided the money you needed to purchase the home, and you agreed to certain terms to repay that money to them.

If you stop making these mortgage payments in any way, the lender has a right to use the foreclosure process so they can sell your home and use the proceeds they receive to not only repay the loan, but also recoup any associated costs and fees they incurred in the process.

Every state sets the rules and regulations for how the foreclosure process works, and at times, it can vary significantly. That being said, the process typically requires the lender to send a default notice first, after which there’s a reinstatement period and, finally, a foreclosure sale.  However, even after the foreclosure is completed most states offer a redemption period allowing the homeowner to pay to the mortgage lender in cash the entire amount received at foreclosure.  

Not every state provides homeowners with redemption rights in foreclosure, but in those that do, it’s important to know what your rights are.

Understanding Redemption Rights

So, what are redemption rights in foreclosure? Simply speaking, the right of redemption allows a property owner to repurchase their property after a lender conducts the foreclosure process.

In most states that provide redemption rights, this can only be done during a specific period of the foreclosure process, which is known as the redemption period.

In Michigan, for instance, the redemption period starts on the day of the actual sheriff’s sale and, in most cases, lasts six months beyond that time. State law also says that in order to redeem the home, the borrower has to pay the amount of the winning bid at the sheriff sale, plus any interest and fees.

In general, the right of redemption is put in place to ensure that a fair price is paid at the foreclosure sale, while also giving borrowers a chance to take back ownership of the property if they’re able to.

The Redemption Period

Each state has different rules and regulations for redemption rights, including what the redemption period is. In most states, the redemption period typically covers a specific amount of time after the foreclosure sale is held — as in Michigan, the state allows generally a 6 month redemption and in some cases 12 months.  However, this does not apply to property tax foreclosures conducted by the County as those tax foreclosures are only entitled to a 30 day redemption.

During the redemption period, a borrower can exercise their right of redemption by paying whatever the redemption amount is, as set by the state. Again, this is generally the amount that’s owed on the mortgage plus any incurred fees and costs.

Exercising Your Right of Redemption

If your property has been foreclosed on and has been sold at a sheriff sale, it’s still possible that you can take back ownership of the property. If you want to redeem your property after the foreclosure sale, you’ll need to provide written notice of your intention to redeem the property to the court, the buyer of the home — i.e., the high bidder at the auction — or some other party.

Your state laws will specify who this notice must be sent to, and what must be included in it. They will also specify to whom the money must be paid to. In some states, it’s the court or the buyer, while in other states, it’s another party who is handling the case. In the state of Michigan, the purchaser at foreclosure is required to file within 21 days of the foreclosure a Purchaser’s Affidavit, detailing the purchase price, the daily interest rate charge, the last day to redeem the property and their contact information to be able to reach them incase they want to redeem.

Limitations and Factors Affecting Redemption

The length of the redemption period varies from one state to the next. The shortest period of time is 30 days, while the longest period is one year.

Not every state provides a post-sale redemption period, and specific factors can change how long the redemption period lasts in some states.

In Michigan, for example, while most properties have a redemption period of six months, that gets extended to 12 months if the outstanding amount of the mortgage at the date of the foreclosure is less than two-thirds of the original principal amount. Farming properties might also qualify for a 12-month redemption period.

If your property has been foreclosed on and you are interested in redeeming it, you should consult with an experienced foreclosure attorney in your state to learn what redemption rights you have, if any.

Protecting Your Property and Rights

While it’s nice to have redemption rights in foreclosure — and it’s certainly something that you can and should take advantage of if you want to — there are other ways that you can potentially save your home if you are having trouble repaying your mortgage.

You can consider applying for financial help with your lender, with your state or both — if available — well in advance of the foreclosure sale. Many lenders will offer loss mitigation options such as loan modifications to borrowers who are struggling to make mortgage payments.

The reason they do this is because it is in their best interest to have you, the actual borrower, remain in the home and pay off the mortgage in full. This gives them the biggest return on their investment, and doesn’t force them to spend time and money to foreclose on your property.

Lenders are typically not in the business of being property owners. Most would typically much rather work with you on a loss mitigation plan rather than foreclose on your home and put it up for sheriff sale.

If you’re struggling to pay your mortgage, it’s important to investigate your financial assistance options, and apply for help, as early as you can in the process to avoid foreclosure and protect your property.

Conclusion and Key Takeaways

Some states provide redemption rights in foreclosure, which allow borrowers to retain ownership of their home even after it was sold at sheriff sale. This is a valuable right to have, as it gives you the power to avoid losing your home if you’re struggling to make payments.

Since redemption rights and periods vary so greatly from state to state, it’s crucial to understand your state’s rules and regulations. This allows you to protect your property throughout the foreclosure process.

By knowing all the details of the redemption period — including the process and limitations — can help you make informed decisions and potentially save your home. 

If you are having trouble making your mortgage payments, don’t hesitate to consult with a HUD-approved housing counselor or a foreclosure attorney to learn more about your options and rights.

In Michigan, Babi Legal Group has a combined 20 years of legal and real estate experience. We provide all of our clients with expert advice on all their needs related to foreclosures and bankruptcy.

To learn more, contact us today.

When homeowners don’t repay their mortgage or property taxes in a timely fashion, lenders, municipalities and other creditors can seek to reclaim their asset through the foreclosure process. 

In order to reclaim their asset — in this case your home or an investment property— the creditor must follow strict guidelines that are set forth by the state in which the home is located. Once this happens, foreclosure sales and execution sales allow the creditor to recoup the money the borrower hasn’t paid.

There are two main types of foreclosures — judicial and non-judicial — and each state has rules about which one can and/or must be used.

Below is a guide to each type of foreclosure, including details about how the process works.

Judicial Foreclosure: Definition and Overview

Judicial foreclosure is a type of foreclosure that involves the court system. In judicial foreclosures, the lender will need to file an official lawsuit in state circuit court in the county the property is located to reclaim their asset.

This happens in many states where there isn’t a power of sale clause in mortgage documents, which would give the lender the legal authority to sell a property if the borrower defaults on the repayments.

Because of this fact, the foreclosure process can take many months, and sometimes even years, to complete. 

Each state will also determine whether there is an availability for borrowers to enter into foreclosure mediation with the lender, and whether there’s a right to cure/reinstate the mortgage once the process begins.

How Judicial Foreclosure Works

In states where judicial foreclosure is allowed or required, there are specific steps that lenders need to follow in order to follow through the process. 

Step-by-Step Explanation of the Judicial Foreclosure Process

The first step in the judicial foreclosure process is that the lender must send a letter to the borrower notifying of its intent to foreclose. This can only happen after the borrower is behind on payments for at least 120 days.

In most states, the debtor will have 30 days to make good on the delinquent payments. If they do not, then the lender must file a lawsuit in court. At the same time, they must issue the borrower a notice of the foreclosure lis pendens by issuing them a summons. 

The borrower can then decide to allow the foreclosure process to proceed, or they can contest it by appearing in court. During the case, if the court decides in favor of the lender, it will enter a judgment that will order the property to be sold to satisfy the outstanding debt. 

In some states, if the sale proceeds don’t cover the outstanding debt, then the lender could be able to seek a deficiency judgment. This would allow the lender to obtain a personal judgment from the borrower so they can recover the difference between the outstanding debt amount and what the house sold for during the foreclosure sale.

One exception to this process is if the borrower has filed bankruptcy and chosen to include the home in the process, which could result in a discharged mortgage.

Non-Judicial Foreclosure: A Different Approach

The other main type of foreclosure is called a non-judicial foreclosure. In the state of Michigan, this is commonly known as a foreclosure by advertisement. While there are some similarities between this type and judicial foreclosures, there are major differences, too.

Key Differences Between Judicial and Non-Judicial Foreclosure

The biggest difference between a judicial and non-judicial foreclosure is that a non-judicial foreclosure doesn’t involve the court system at all. In states that allow it, lenders can foreclose on a home without going through the court system.

The deed of trust or a mortgage on the home will authorize a neutral, third-party trustee, or through the county sheriff’s office to conduct the foreclosure by advertisement process on the property if a borrower defaults on the loan. This process is able to move forward if there’s a “power-of-sale” clause in the mortgage note, which gives the lender the right to sell the house and use whatever profits they obtain to pay off the balance of the mortgage.

The rules and regulations for non-judicial foreclosures vary widely by state, and state law will determine which milestones need to be reached for each step of the foreclosure process. Even one missed payment in some states can trigger the process and allow lenders to start the foreclosure process.

State-by-State Variations in Foreclosure Laws

As mentioned, there are major state-by-state variations in foreclosure laws. The laws that apply are based on where the home is located, not where the lender is located.

Understanding your individual state’s laws when it comes to foreclosure is important, because it outlines what your rights as a borrower are, in addition to outlining what lenders must do to foreclose on a property.

Not only will the state laws determine whether a judicial or non-judicial foreclosure will be used, but they’ll also determine how long the foreclosure process will take, whether deficiency judgments are allowed, what notifications must be given to the borrower and when, whether the borrower can redeem the property during the process and much, much more.

There are 18 states that allow judicial foreclosure, though some of those states also allow non-judicial foreclosures in some instances. In Iowa, for example, a non-judicial foreclosure option is available if the borrower and lender can agree on it. 

The remaining 32 states either allow for non-judicial foreclosure, or offer both as options for lenders.

Understanding Deficiency Judgment Laws Across the US

The reason why it’s important to understand your state’s foreclosure laws is that they determine what actions can trigger foreclosure. For instance, in some states, being late on your mortgage payments by even one day is enough for a lender to foreclose.

The entire foreclosure process can take different amounts of time to complete, depending on the state, as well. Plus, some states allow for borrowers to cure/reinstate their mortgages along the way, and some allow for foreclosure mediation and adjustments to the original mortgage.

In addition, some states allow for deficiency judgments, which is basically a personal judgment that’s levied against the borrower should there be a discrepancy between how much the home sold for during the foreclosure sale and the total amount owed on the mortgage.

In these states, borrowers are at risk of not only losing their home through the foreclosure process, but also having to pay this deficiency — which can end up being very costly.

Deficiency judgment is allowed in all but six states, with some exceptions. In only Washington state, Oregon, Montana, Minnesota, California and Alaska is deficiency judgment not allowed in most cases. All of those states are also non-judicial foreclosure states.