Judicial foreclosures require a court order to take place because the lending documents do not give the lender the right to sell the property. Usually, this means the parties executed a mortgage rather than a deed of trust, although some mortgages also contain powers of sale.
In a judicial foreclosure, the lender must file a lawsuit against the borrower and also name all the other parties who might have an interest in the property. Other parties might include other creditors, the borrower’s spouse, tenants of the owner, and similar persons. The lender must obtain service on each party, which means the court papers must be delivered in a particular way and normally to a particular person. Simply mailing copies of the lawsuit is usually not enough.
The lender also files something called a lis pendens in the real estate records where deeds are recorded. The lis pendens is a notice that the creditor has filed suit in order to foreclose on the property. If the owner sells the property to someone else after the lis pendens has been filed, the buyer is considered to have been put on notice that foreclosure has started. The buyer cannot complain when foreclosure takes place and he or she ends up owning nothing.
Each party then has a certain number of days to file an answer. An answer might contest the foreclosure itself, or might claim that a party has rights that are superior to those of the foreclosing lender. An answer might also consist of a simple acknowledgment that the lender has the right to proceed as it is doing, and the party has no dispute with that action.
If the borrower does not answer, the court might require the appointment of a referee to determine the amount due. If the borrower does answer, then each party will present arguments regarding its version of the amount due, and the court will decide the actual amount that is due.
In some states, the court will establish a minimum value for the property. If there are no higher bids at auction, the creditor must buy the property at the preset value and give the borrower a credit in that amount.
After all the disputes have been resolved, if foreclosure is still warranted, the court will enter an order of foreclosure. That order is not the foreclosure itself. An auction must then take place. The borrower still owns the property up until the auction and the delivery of a deed to the auction buyer.