The basics of foreclosure law
Whether you are an investor or a victim of foreclosure, it pays to understand the basics of foreclosure law. Standard foreclosures affecting home loans can be divided into two types: judicial foreclosures and non-judicial foreclosures. Some states allow both types of foreclosures, while other states only allow one type or the other.
The process is broadly similar in both cases - lenders must file a notice of default or Lis Pendens with the local county authorities. In the case of judicial foreclosures, the Lis Pendens is filed by a foreclosure lawyer at the county court. For non-judicial foreclosures, a trustee files a Notice of Default with the County Recorder.
Foreclosure usually begins if a homeowner defaults on home loan repayments for three months or fails to pay property tax for three years. Government foreclosures on the basis of other liens on the property or non-payment of income tax are more complicated. It's best to contact a legal professional to explain how foreclosure law applies in these cases.
After notice is filed, the homeowner is granted a reinstatement period of up to three months. If the outstanding debt is repaid before this deadline, the loan can be reinstated. Many homeowners sell their homes at this stage to bring their account up to date.
After the reinstatement period, the trustee or court will publish details of the auction of the property (in non-judicial foreclosures, this is known as a Trustee's Sale). This is published a minimum of three months after the notice of default and a minimum of 21 days before the date of the auction.
If no steps are taken to renegotiate the loan or take other loss mitigation measures, the home will be sold to the highest bidder. The minimum bid is set to reflect the total outstanding debt, including charges and interest. If no bidder is found, ownership of the property will revert to the agency filing the foreclosure.
If the sale fails to cover the outstanding debt, the lender will typically sue the homeowner for the remaining balance or 'deficiency'. Lenders also have the option to waive the outstanding balance, but this is regarded as taxable income coming to the homeowner by the IRS. In judicial foreclosures, homeowners may have the right to redemption, allowing repurchase of the home for the winning bid price up to a year after the sale.
The website Foreclosures.com (http://www.foreclosures.com) has some excellent resources on foreclosure law, including a glossary of legal terms and a state by state guide to foreclosure laws.