When someone takes out a loan to buy real estate, they generally sign a promissory note, which is the promise to repay the loan according to the terms in the agreement, along with either a mortgage or a deed of trust.

While both a deed of trust and a mortgage will establish a lender’s security interest in the property, they differ in the number of parties involved and the process required to foreclose.

A mortgage is an agreement between two parties, the borrower and the lender. If the borrower defaults, the lender can take possession of the property. A mortgage holder generally has to go through the courts to get an order to foreclose.

Meanwhile, a deed of trust is an agreement between three parties: the borrower, the lender, and a trustee, typically the title company[1]. The lender transfers its security interest in the property to the trustee in the deed of trust. If the borrower defaults on the note, the trustee assumes control of the property and sells it. When the sale proceeds from the property are received by the trustee, it will transfer those proceeds to the lender. The deed of trust grants this power to the trustee, and as a result, if a deed of trust includes the “power of sale” language, no court order is required to foreclose on the property.

However, every state has different laws and customs regarding how this foreclosure process works. There is no “one size fits all” loan document or procedure that applies exactly the same way in all 50 states.

RELATED: Land Contract or Deed of Trust? Which is Better for Seller Financing?

When a borrower defaults on a loan secured by real estate, the lender can initiate foreclosure proceedings to repay the debt, which can either be judicial or non-judicial.

In a judicial foreclosure, the lender must go through the court system to foreclose the property. State law generally determines whether to use a judicial or non-judicial foreclosure, although some states allow both.

The following states typically use judicial foreclosure:

• Connecticut
• Delaware
• Florida
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maine
• New Jersey
• New Mexico
• New York
• North Dakota
• Ohio
• Pennsylvania
• South Carolina
• Vermont
• Wisconsin

For more information on how the foreclosure process is handled in each state, the interactive map below links to more state-specific details as they apply throughout the United States.

In general, if a mortgage secures the loan, then the lender must use a judicial foreclosure; if by a deed of trust, the lender resorts to a non-judicial foreclosure. A deed of trust, which is held by a trustee and not the lender, contains a “power of sale” clause that allows the trustee to initiate foreclosure without involving the court. The lender simply notifies the trustee that the loan is in default, who then begins the foreclosure process.

A judicial foreclosure takes at least six months, but it can even take three years or longer in some states. Virginia, Montana, and Mississippi have the shortest judicial foreclosure timeline[1], lasting just over 200 days. Indiana, Hawaii, and Nevada have the longest, averaging 1,500 days or more.

The specific steps may vary slightly, but the judicial foreclosure process usually proceeds as follows:

1. Pre-Foreclosure Review

Lenders typically cannot start foreclosure until the borrower has missed four payments. However, once the borrower misses two payments, the lender may start loss mitigation procedures. The borrower may receive a breach letter with information about alternatives to cure the breach, such as loan modification, deed in lieu, or short sale. Federal law requires lenders to provide this information before initiating foreclosure.

2. Lender Files a Lawsuit

After 120 days, the lender can file a foreclosure complaint in state court. The borrower receives a summons with a deadline for response, usually 30 days from the summons’ date. The borrower can present evidence and arguments against the complaint without filing a separate lawsuit. If the borrower objects to the foreclosure, the case goes to trial.

3. Judgment Is Entered

If the borrower does not respond to the summons, the lender generally gets a default judgment, which allows them to sell the property. The lender arranges the sale and notifies the borrower of the date of the sale.

4. Foreclosure Auction Is Held

Most of the time, the lender enters a credit bid for the minimum amount they will accept for the property. If a third party enters a higher bid, the property is sold to the highest bidder. In many cases, the lender’s credit bid is the highest, so ownership reverts to the lender, and the property becomes real estate owned (REO). Some states require the court to confirm the sale before it can be completed.

5. Deficiency Judgment May Be Entered

If the foreclosure sale price does not cover the loan’s balance, many states allow the lender to obtain a deficiency judgment against the borrower[2]. The lender can garnish wages, freeze bank accounts, or attach liens to other property to collect the deficiency judgment.

6. Right to Redeem Period Begins

Some states allow the borrower some time to redeem the property, either by paying the lender the full mortgage balance and applicable fees or paying off the successful bidder. This period can be as long as a year in some states.

7. The Homeowner Leaves Voluntarily or Is Evicted

State law determines the amount of time the homeowner can remain in the property after the foreclosure sale. If the borrower does not leave voluntarily within that time, the new owner can initiate the eviction process.

Investing in judicial foreclosures carries more risk than investing in non-judicial foreclosures. This is due to the extended timeline and the right of redemption period[3], which is typically not part of non-judicial foreclosures. An investor could have the winning bid, but not take possession for a year or more. There is always the risk that the homeowner secures funds to redeem the property.

RELATED: How Can Foreclosure.com Help Real Estate Investors?

However, opportunities exist in the pre-foreclosure period when the seller is highly motivated. In addition, during this stage, the buyer gets standard disclosures and access to the property for an appraisal and inspections. If the sales price is below the loan balance, the lender usually has to approve a short sale.

If the property reverts to the lender after the foreclosure auction, an investor may negotiate a favorable price. The buyer also has access to REOs for appraisal and inspections, plus the lender takes care of any liens and back taxes. The lender may also negotiate closing costs and extend financing to incentivize the sale.

Judicial foreclosures are more time-consuming and complex than non-judicial foreclosures; in some states, the process can take three years or longer. Consequently, it is important to understand applicable state laws and how they affect the foreclosure process.

However, there are advantages to borrowers in the judicial foreclosure process as they can object and defend against the action without filing a separate suit. Judicial foreclosures also carry more risk for investors because they take much longer to conclude and offer borrowers a right to redeem the property even after the foreclosure sale.

1. ATTOM Data Solutions. (2019.) Top 10 States with Longest Foreclosure Timeline. Retrieved from https://www.attomdata.com/news/uncategorized/top-10-states-with-longest-foreclosure-timeline/
2. Lee, J. (n.d.) How Are Deficiency Judgments Collected? NOLO. Retrieved from https://www.alllaw.com/articles/nolo/foreclosure/how-deficiency-judgments-collected.html
3. Agadoni, L. (2020.) Right of Redemption: An Investor’s Guide. Millionacres. Retrieved from https://www.fool.com/millionacres/real-estate-investing/reo-foreclosures/right-redemption-investors-guide/