Read on to get an overview of the parties and terminology involved in a home loan transaction, find out the general steps in the foreclosure process, and learn about some defenses that might be available to you in a foreclosure.
Home Loan Transactions: Parties Involved
The key parties involved in most home loan transactions and foreclosures are:
- The borrower. The borrower is the individual (the homeowner) who borrows money and pledges the home as security to the lender for the loan. The borrower is sometimes called the “mortgagor.”
- The lender. The lender originates the loan. Sometimes the lender is called the “mortgagee.”
- The investor. An investor buys loans from lenders. Fannie Mae and Freddie Mac are, for example, investors.
- The servicer. The servicer, which is the company you make your monthly payment to, handles the loan account. Often the servicer is a third party that manages the account on behalf of the lender or an investor for a fee. A servicer’s duties include collecting and processing loan payments, as well as initiating and monitoring a foreclosure when a borrower stops making payments.
Home Loan Transactions: Terminology
Buying a home normally involves a large amount of money so it’s common for a buyer to take out a loan, rather than pay the entire amount in cash. As part of a home loan transaction, a borrower typically signs two main documents: a promissory note and a mortgage (or deed of trust).
The Promissory Note: Like an IOU
A promissory note is the document that contains a borrower’s promise to repay the amount borrowed.
Mortgages and Deeds of Trust Give the Power to Foreclose
A mortgage—or, in some states, a deed of trust—is the contract that gives the lender the right to foreclose if the borrower doesn’t make payments on the loan. When the lender records this document in the land records, it creates a lien on the home.
Endorsements and Assignments
Promissory notes are transferable, and banks often buy and sell home loans. When a loan changes hands, the promissory note is endorsed (signed over) to the new owner of the loan. The seller documents the transfer by recording an assignment of the mortgage or deed of trust in the land records.
Foreclosure Steps
If you default on your loan by falling behind in payments or breaching the agreement in some other way, the servicer will probably refer the loan an attorney or trustee for foreclosure. Foreclosure works differently in each state, but the two basic types are judicial foreclosures and nonjudicial foreclosures.
Judicial Foreclosures Go Through Court
In a judicial foreclosure, an attorney files a lawsuit on behalf of the lender or investor in court to foreclose the home. You’ll receive a copy of the complaint, sometimes called a petition, which starts the foreclosure. You then get a certain number of days, like 30, to respond to the lawsuit. If you don’t file an answer in court—or if you file a response, but the court decides the foreclosure should go ahead—the court will grant a judgment of foreclosure in favor of the foreclosing party and set a sale date. The foreclosure sale is typically an auction where the public, as well as the foreclosing party, may bid on the property. The highest bidder becomes the new owner of the home.
Nonjudicial Foreclosures Generally Don’t Involve Any Court Action
All states allow judicial foreclosures, but about half also permit nonjudicial (“power of sale“) foreclosures. In a nonjudicial foreclosure, an attorney or trustee—again, on behalf of the lender or investor—completes certain out-of-court steps.
Typically, a nonjudicial foreclosure involves one or more of the following steps, depending on state law:
- mailing the borrower a notice of default that tells how much time the borrower has to reinstate
- recording the notice of default in the local land records office, and mailing the borrower a notice of sale that states when the property will be sold. Like in a judicial foreclosure, the property is usually sold at a public auction.
Depending on state laws, a borrower might get a combined notice of default and sale, just a notice of sale, or notice by publication in a newspaper and posting on the property or in a public place.
After Foreclosure: Right to Redeem, Deficiency Judgments
You own your home up until the foreclosure sale. So, you may legally stay in the property until this time. In addition, depending on state law, you might be able to stay in the home until the redemption period expires or until some other action, such as ratification of the sale, occurs.
What Is a Redemption Period?
Some states have laws giving a foreclosed homeowner the right to regain ownership of the home—called “redeeming” the property—after a foreclosure sale by reimbursing the buyer for the amount paid at the sale or by repaying the full amount of the mortgage debt.
What Is a Deficiency Judgment?
Sometimes, a foreclosure sale doesn’t bring in enough money to fully repay the home loan. When this happens, the difference between the sale price and the amount owed is called a “deficiency.” In some states, the foreclosing party can get a personal judgment called a “deficiency judgment” against the borrower for this amount.
Sometimes, Reforeclosure Is Necessary to Clear Up Title to the Property
Homeowners occasionally face back-to-back foreclosures when the title to the property has problems after the first foreclosure. The second foreclosure is called a “reforeclosure.”
Defenses to Foreclosure
Depending on state law and your individual circumstances, you might have a defense to a foreclosure. A few potential foreclosure defenses include:
- you’re entitled to protection from foreclosure under the Servicemembers Civil Relief Act
- the servicer didn’t follow state foreclosure procedures
- the servicer didn’t follow federal mortgage servicing laws, or
- the servicer made a serious mistake.