The Land Foreclosure Process
- After the mortgage lender reviews the loan application, it will approve or reject the loan. If the loan is approved, the new borrowers must sign a series of important documents at the loan's closing. Two of these documents include the promissory note and the security instrument. The promissory note states that the borrowers are indebted to the lender for the amount of money borrowed and that the borrowers promise to repay the lender within a certain period of time. The security instrument acts as the lender's form of collateral in case the borrowers are unable to repay the loan. Depending on the state laws, the security instrument is either a mortgage or a deed of trust. A mortgage acts to place a lien on the property in favor of the lender until the loan is paid in full. A deed of trust places the property in a trust until the loan is paid off. The lender must posses a valid security instrument to initiate foreclosure. This means the security instrument must be signed and filed on record in accordance with state guidelines.
- Some states require that lenders proceed with foreclosure through the judicial systems. Often, these states use the mortgage as the security instrument. Once a borrower's loan enters default, the lender may notify him. Some states require for a notification to be sent. After the loan has been in default for a certain period of time, usually around 90 days, the lender will need to file a formal complaint with the court system in the county the property lies in. This complaint is reviewed by the court and served to the borrower. The borrower will be granted a certain period of time to answer the complaint or enter a defense. If the borrower fails to do so, the court can issue a ruling in favor of the lender. This ruling will allow the lender to auction the property to recoup their loss on the loan default.
- In states that do not require judicial foreclosure, the lender does not have to file a formal complaint in order to initiate the land foreclosure process. The lender notifies its appointed trustee that they wish to foreclose on the property in question. The trustee then handles the process in accordance with state guidelines. In nonjudicial states, the foreclosure laws generally require the borrowers to receive a notice of default and a notice of sale. Before any action is actually taken. If the borrowers cannot repay the lender or work out an agreement, the trustee can hold an auction sale on the property after a certain amount of time has passed.
- Foreclosure sales occur after all of the initial foreclosure steps have been completed and the borrower has not submitted payment to the lender. Either the county sheriff or the trustee can hold the auction sale. Typically, the starting bid is set by the lender in the amount of the unpaid loan balance, plus fees and penalties. Virtually anyone can bid on a foreclosure auction property. The winning bidder will gain ownership of the property through a deed. Often, the winning bidder must have the full cash payment on the day of the auction, however some states allow the bidder a few days to pay the balance. Some states, usually judicial foreclosure states, allow the borrowers a redemption period after the auction sale. During this time, the borrowers can repay the lender in full in order to reclaim ownership of their property. If they cannot repay the lender during the redemption period, the winning bidder takes ownership. If the auction sale does not have any bidders, or the lender does not accept a low bid, ownership of the property will revert back to the lender. These properties are called real estate owned, or REO, properties.