Foreclosures are a specific class of involuntary transfers that have very formalized steps throughout the process. They vary from state to state in the particulars but generally fall into two categories: judicial foreclosures and nonjudicial foreclosures.
Usually, states that employ something called a deed of trust as security for real estate loans follow the nonjudicial foreclosure route. Most other states, which use an instrument called a mortgage, must go to court in order to complete a judicial foreclosure. Some states use mortgages but also allow nonjudicial foreclosures. To find out about the rules in your state, check Appendix C for resource information.
Generally speaking, a borrower is usually given a certain grace period in the loan documents. He or she may catch up on the loan payments within the grace period and suffer no bad consequences. The grace periods vary among states and different lenders. After the grace period expires, the lender will usually send out a notice of acceleration to the borrower. The notice says that because of the continuing default in making monthly payments, the lender is now declaring the entire balance of the loan due and payable immediately.
There is then some sort of public notice. It might be a notice in the legal section of the newspaper or on a bulletin board designated for that purpose at the local courthouse. It might be a notation in the real estate records, or the filing of a lawsuit by the lender. That is usually the first indication to potential buyers that a foreclosure is in process.
At some point before the auction, the lender will usually request an updated title report on the property. This will confirm the lender’s priority among all the possible claimants, such as other mortgages, judgment creditors, or unpaid taxes. The lender might have to give additional notices under the circumstances, such as to the IRS. Or, the lender might re-evaluate the amount of money he or she would be willing to accept at an auction, especially if there are other liens that will remain on the property after a foreclosure.
Normally, the lender will also obtain an updated appraisal or something called a broker’s price opinion (BPO). The BPO is more common. The lender will contact a local real estate broker and ask that broker for something in writing indicating the price the broker would recommend asking if the property had a listing. As a real estate broker myself, I can tell you that any request for a BPO almost always means a foreclosure will occur. This gives the broker a tremendous advantage, he or she gains early knowledge of a potential foreclosure and already knows the probable value of the property.
Unfortunately, the BPO system may lead to abuse of power, as unethical brokers provide very low values, hoping to buy the property themselves or assist a client in bidding at the auction.
The next stage leading up to foreclosure depends on whether the property is in a judicial or a nonjudicial state. Those issues are covered separately as follows.