What is Non-Judicial Foreclosure?
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Non-Judicial Foreclosure Basics: Mortgage vs. Deed of Trust
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. 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.
Non-Judicial Foreclosure States
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.
State law determines which instrument is used in real estate loans, and thus, which foreclosure process is required.
The following states primarily use deeds of trust and non-judicial foreclosures:
- District of Columbia
- New Hampshire
- New Mexico (rarely used in residential properties)
- North Carolina
- Rhode Island
- South Dakota
- West Virginia
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.
Non-Judicial Foreclosure Process
The non-judicial foreclosure process is typically much shorter than the judicial one. In 2017, data shows that the average time to foreclose was 1,027 days, while some states that only allow judicial foreclosures, such as Indiana, averaged over 2,300 days to foreclose.
Although state law varies, most non-judicial foreclosures follow the following timelines and procedures:
1. Borrower Is 90 Days or More Behind on Payments
The lender sends a breach letter notifying the borrower of intent to foreclose unless the loan is made current. The letter includes the full amount required to cure the default, including late fees and other costs.
2. Borrower Is 120 Days Behind on Payments
The lender sends a Notice of Default (NOD) with a deadline to reinstate the loan by curing the default. In some states, the notice also includes a Notice of Sale with the proposed date of sale of the property. Some states permit only a Notice of Sale without a NOD. Some states allow lenders to bypass the NOD and sales notice entirely and simply publish the notice of sale in the local newspaper. Once the Notice of Sale has been sent, the property is officially in foreclosure.
3. Borrower Is Notified of Time to Reinstate
Most states give borrowers a chance to reinstate the loan prior to the auction sale. Sometimes, the reinstatement period is included in the deed of trust. During this time, the borrower can cure the default and cancel the foreclosure sale by bringing the loan current and paying any late fees, interest, and administrative or legal costs.
4. Foreclosure Auction Occurs
If the borrower does not reinstate the loan during the reinstatement period, the foreclosure auction proceeds on the date specified in the notice. In some states, this can happen in as little as three weeks after the notice of sale. The lender may enter a credit bid, typically for the full balance owed on the loan plus costs and fees. If there are no bids higher than the credit bid, the lender gets the title, and the property becomes real estate owned (REO).
5. Redemption Period Begins
Some states give borrowers a right to redeem the property for a certain period after the foreclosure auction. During the redemption period, the borrower can pay the loan in full if the property is REO or pay off the winning bidder and reclaim the property. While the redemption period usually only applies to judicial foreclosures, a few states grant the same right to homeowners in a non-judicial foreclosure.
6. Borrower Is Evicted or Leaves Voluntarily
State law determines how long a borrower can remain in the property after the auction. If the borrower does not move out voluntarily, the lender or winning bidder can begin eviction proceedings.
Investing in Foreclosure Properties
Investors do not have to wait for a foreclosure auction to buy a distressed property. It is possible to buy a distressed property in the pre-foreclosure process and even after the auction occurs.
A homeowner facing foreclosure can be a motivated seller. The owner still controls the property and may be desperate to avoid the financial and credit consequences of foreclosure. The seller may entertain any offer that pays off the loan. If the property is underwater or the lender believes it will not fetch a good price at auction, the lender may choose to cut their losses and agree to a short sale.
There are multiple advantages to buying during the pre-foreclosure phase. First, the seller can provide disclosures about the condition of the property, and the buyer can do due diligence with inspections, an appraisal, and a title search. In addition, the buyer can apply for a loan to finance the purchase.
Foreclosure Auction Phase
Investors may get the lowest prices on property bought at a foreclosure auction, but there are some risks. The property is sold as-is with no inspections or disclosures. Most of the time, the buyer needs the purchase price in cash on the day of the sale.
If the state allows a redemption period, the property title will not be transferred until this period expires.
Lenders are highly motivated to unload REOs, which means investors may get a good deal. Also, the buyer can usually have access to the property for appraisal and inspections. In many cases, lenders will even make necessary repairs prior to listing the property.
There are other advantages to buying an REO. The lender pays off any liens and back taxes, so the buyer does not have to worry about clouds on the title. Finally, lenders may offer to finance and even contribute to closing costs to make it easier to sell the property.
Lenders can foreclose on a property in one of two ways: judicial or non-judicial. State law determines the type of foreclosure process. In states that use a deed of trust to establish a security interest in a property, they typically use the non-judicial foreclosure process. They are generally quicker because they require no court order.
Investors who buy at a non-judicial foreclosure auction also face less risk. The reason is that the right to redeem the property granted in judicial foreclosures usually does not apply.
- Sineriz, M. (2020.) Deed of Trust vs. Mortgage: Key Differences. LendingTree. Retrieved from https://www.lendingtree.com/home/mortgage/deed-of-trust-vs-mortgage/
- Loftsgordon, A. (n.d.) State Law Determines Who Can Conduct Nonjudicial Foreclosures. Nolo. Retrieved from https://www.nolo.com/legal-encyclopedia/state-law-determines-who-can-conduct-nonjudicial-foreclosures.html
- ATTOM Data Solutions. (2018.) U.S. Foreclosure Activity Drops to 12-Year Low in 2017. Retrieved from https://www.attomdata.com/news/foreclosure-trends/2017-year-end-u-s-foreclosure-market-report/