Different Types of Foreclosures
Two main types of foreclosures:
Foreclosure by judicial sale (i.e. judicial foreclosure):
A judicial foreclosure refers to the sale of a mortgaged home that is processed by state and local courts to protect whatever equity the borrower may have in the property. Equity is the remaining interest or claim that a borrower may have in the property after all his or her debt has been paid.
This foreclosure process is put into action when the lender files a complaint against the borrower stating the amount that is owed to them, and why the lender should be given the right to foreclose in order to sell or take possession of the home. Like any other legal complaint (i.e. lawsuit), all involved parties must be notified. The homeowner must be properly serve with notice of the complaint. (The laws governing this process varies from state to state)
If the Court finds that the lender’s reasons for the suit is valid, a judgment for the total amount owed to the lender, including costs of the foreclosure will be placed within a state or local court. Once the judgment has been entered, a writ will be issued by the court authorizing a sheriff’s sale (i.e. public foreclosure auction). The auction usually requires that the buyer pay the entire amount of the home price at the time of the sale. The entire process is monitored by the court. It will make sure that the lender is the first claimant, meaning that it will be the first to be paid after the foreclosed property is sold. Whatever amount is left over after the mortgage is paid off will be used to satisfy the amount owed to other lien holders. If there are any proceeds that remain after all debts have been paid, the borrower will receive the residual amount.
Foreclosure by power of sale (i.e. nonjudicial foreclosure or statutory foreclosure):
Foreclosures by power of sale are conducted by the mortgage holder (i.e. lender), rather than the court. It is often a much quicker process than a judicial foreclosure. There are 29 states that allow foreclosure by power of sale.
In many jurisdictions, a deed of trust is used to enforce a power of sale foreclosure, so the process is guided by a deed of trust or by the trustee (i.e. third party holding the trust as security) who acts for the benefit of the lendor. A deed of trust is a document that allows a trustee i.e. third party) to hold the title to a real estate property in a trust as security to ensure that the trustor (i.e. borrower) repays his loan to the lender i.e. beneficiary of the deed of trust).
Trustees are given the right to coordinate a foreclosure process by a power of sale clause that is included in a deed of trust. In the unfortunate case that the borrower defaults on the agreement, the mortgage holder (i.e. lender) notifies the trustee that he or she is to foreclose on the mortgage. The trustee then conducts the foreclosure process (The trustee is not obligated to check if the foreclosure is justified). Although the court is not supervising the foreclosure, there are instances when the statutory foreclosure process is subject to judicial review. Similar to a judicial foreclosure, this type of foreclosure entails the sale of a property to cover the amount owed to the lender because of defaults on mortgage payments by the borrower. Like the judicial foreclosure, the lending companies are the first claimants of the sale’s proceeds.