5.7 Foreclosure

Foreclosure

Foreclosure is the legal process by which a lienholder enforces a lien by forcing the sale or transfer of the secured property. State law governs the process, which may be judicial, non-judicial, or strict foreclosure.

• Judicial foreclosure: Requires a court proceeding. The lender accelerates the debt, files a foreclosure suit, and the court orders a public sale. Proceeds pay liens by priority, and deficiency judgments may be issued for remaining debt. Borrowers may have a right of redemption.
• Non-judicial foreclosure: Used when the mortgage has a “power of sale” clause. The lender gives notice and sells the property without court action. No right of redemption, but the lender may file a separate deficiency suit.
• Strict foreclosure: The lender files suit, and if the borrower does not pay within a court-set period, the court awards title directly to the lender.
• Deed in lieu of foreclosure: The borrower voluntarily deeds the property to the lender to avoid foreclosure proceedings. Existing liens remain on the property.
• Short sale: The lender agrees to accept a sale price lower than the loan balance, often releasing the seller from further obligation. The process requires lender approval and may have tax consequences.

Check-In Questions

• Which foreclosure process allows the lender to sell the property without going to court?
  Judicial foreclosure
  Non-judicial foreclosure
  Strict foreclosure
  Deed in lieu of foreclosure
  Show Answer

  Correct Answer: Non-judicial foreclosure
  Non-judicial foreclosure is possible when the mortgage has a “power of sale” clause.
• What is a deficiency judgment?
  A court order for the borrower to pay remaining debt after foreclosure
  The right to redeem the property
  A notice of default
  A transfer of title to the lender
  Show Answer

  Correct Answer: A court order for the borrower to pay remaining debt after foreclosure
  If the sale does not cover the debt, the lender may seek a deficiency judgment.