Different Types of Foreclosure

Foreclosure is an event that most homeowners want to avoid. In essence, all foreclosures involve a lender taking back property that secured a loan when the borrower has failed to make regular payments on that loan. However, not all foreclosures are the same. If you, like many Americans, are having trouble making your mortgage payments then it is important that you understand the different types of foreclosure and how they might apply to your individual situation.

Judicial Foreclosure

This is the most common type of foreclosure. It is allowed in every state and in some states it is required. It involves the sale of the mortgaged property on which the borrower has defaulted on his loan repayment obligations. The sale occurs under judicial supervision. The proceeds from the sale are used to pay the mortgage and any other lien holders in order of their legal priority to be paid. Any proceeds earned in excess of the debt are the property of the borrower.

Power of Sale

In order take advantage of this type of foreclosure, two specific elements must be present. First, your individual mortgage contract must contain foreclosure by power of sale terms. Second, the state in which the property is located must allow these types of foreclosures. 

Basically, this type of foreclosure allows the mortgage holder to sell the property without judicial involvement. Once the property is sold, the money is used to pay the mortgage holder and any other lien holders in order of legal priority and any remaining funds are provided to the borrower.

Strict Foreclosure

Only a handful of states, located in New England, still allow this kind of foreclosure. In this type of proceeding, the lender goes to court and requests a foreclosure. The judge then provides the defaulting borrower with a period of time in which to make the loan payments current. If the borrower is unable to make the loan payments current then the lender gets title to the property and has no obligation to attempt to sell it and provide proceeds to the borrower. In most cases, this type of foreclosure is only available if the value of the property is less than the amount owed on the property.

The time frame that is allowed for a strict foreclosure is typically set by the judge. In some cases it might be as short as a few weeks or as long as several months. Borrowers have the option of trying to sell the property in order to pay off their mortgage obligations or they may borrow or obtain enough money to become current on their loans in another manner.
Foreclosure is a serious legal, financial and personal matter. It often involves a person, or a family, losing their home. It involves putting a significant mark on the homeowner’s credit report that could make it difficult to obtain future loans. Therefore, it is important to think about foreclosure alternatives and to consult with an attorney prior to entering foreclosure proceedings.

The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.

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