Understanding Judicial vs Non Judicial Foreclosure: A Comprehensive Guide
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.