Non-Judicial Foreclosure

As noted on our other webpages discussing foreclosure there are four types of foreclosures:  Foreclosure by Judicial Sale, Foreclosure by Power of Sale (Non-Judicial Foreclosure), Strict Foreclosure, and Deed in Lieu of Foreclosure.  This webpage is going to discuss Foreclosure by Power of Sale or non-judicial foreclosure (which may be used interchangeably with foreclosure by power of sale throughout the page).

Foreclosure by power of sale occurs when the borrower defaults on his/her loan and the lender, per terms of the contract, initiates the right to sell/auction the home without going through the judicial process. Currently, non-judicial foreclosures have been approved in twenty-nine of the fifty United States; however, the borrower and lender have to agree to this process prior to the approval of the loan.  The agreement to grant the bank or lender a non-judicial foreclosure is entered as a clause in the mortgage loan agreement. 

The process of a non-judicial foreclosure is similar to judicial foreclosure without the courts involvement.  Like with most foreclosure laws each state has a specific set of guidelines in order to make a non-judicial foreclosure legal.  Therefore, when we list the process of a non-judicial foreclosure we are speaking in generalities.  If the reader needs more specifics it is best to research your states law or obtain the counsel of a lawyer.

A non-judicial foreclosure is a preferred process for lenders than a judicial foreclosure.  This is due to the limited costs it takes to foreclose on a home.  While a non-judicial foreclosure disallows a deficiency judgment which is a benefit for the lender it also eliminates the judicial system which minimizes the lenders costs for their time, legal fees, and having to appear in court.  A deficiency judgment means the court mandates the borrower to pay the lender any remaining balance on the note after their home was sold as a foreclosure.  A person may read this and think, “hey this is a positive thing”, but it is not and here is why.  A lender does not want to go to court because they have a chance of losing their case, the costs are extremely high, and it takes longer to sell the property.  The time period of a foreclosure in a judicial foreclosure is four to eight times as long compared to a non-judicial foreclosure.  A judicial foreclosure takes between one to two years while a non-judicial foreclosure takes between three to six months.  Therefore, it is in your benefit to take the lender to court.  The longer you can keep your case in court the longer you stay in a home mortgage free which saves you money and loses the lender money.  Also note a state that accepts a non-judicial foreclosure and a judicial foreclosure the document that is used to secure the mortgage determines which method of foreclosure is allowed.  Additionally, a non-judicial foreclosure is used with a deed of trust documentation.

Essentially, according to Civil Code a non-judicial foreclosure utilizes the same process of judicial foreclosure with a few exceptions.  Therefore we will state what the rules are for judicial foreclosure followed by the exceptions which are the main differences between the two.

The timeline for a non-judicial foreclosure is as followed.  Once the homeowner/borrower becomes three months (90 days) delinquent on their mortgage payment they are eligible for foreclosure.  The documents are filed by the lender to the correct authorities.  The lender will file of Notice of Default (NOD herein) with the clerk of the court or county recorder.  It takes the county recorder approximately a week and a half to file the NOD.  Once filed a NOD and Importance noticed are mailed to the borrower who is named on the Deed of Trust in addition to any other parties the lender is aware to notify.  Additionally, a formal copy of the notice is delivered to any persons or parties with a recorded Request for Notice.  This required by Civil Code.  The persons who receive the NOD have approximately three to four weeks to review and get help from a professional.  During this time period all parties with an interest in said property are notified.  This is another requirement of the law.  After three months of the recorded NOD a Notice of Trustee’s Sale is sent to be published.  The following all happens within a month prior to the scheduled sale date.  A Notice of Sale (NOS herein) is issued to the Internal Revenue Service, a NOS is published in a place other than a legal publication for a minimum o f three consecutive weeks (i.e. newspaper), there must be a posting of the NOS on the physical property, send a copy of the NOS to the borrower and other persons or parties who received a NOD (requirement by law).  The NOS must include the following:

  • time and location of the sale
  • correct property address of the sale
  • The owner of the titles name
  • Address of the location the sale will be held
  • The phone number of a contact where the sale will be held

Two weeks prior to the sale date the County Recorder records the Notice of Trustee’s Sale.  A week prior to the sale the borrower losses the right to reinstate the property which means they are not allowed to pay the delinquent payments, late charges, and interest on the property.  On the day of the sale three outcomes may happen: The official seller postpones the sale of the property on site on sale day, the property is sold to the highest bidder, or the property reverts to the lender or legal beneficiary.

Exception:

A lender is required to give a notice of intention that they will be foreclosing on the borrower’s home prior to enforcing the approved processes for foreclosure.

In a non-judicial sale the party who has right to foreclose on the home must use another means other than a publication of legal notice to make buyers aware of the foreclosure.

The biggest exception is that a non-judicial foreclosure normally does not allow the lender to try and obtain a deficiency judgement in the court system against the borrower.  The legal term the legal system gave to this type of borrower is a protected borrower.  Due to a borrower being protected it eliminates the court process and vastly accelerates the process of foreclosure.

Note to the purchaser of a foreclosure:  If you are going to buy a foreclosure that is through a non-judicial foreclosure please make sure to use an attorney.  This is extremely important because the legal language in a non-judicial foreclosure contract needs to be correct to ensure you are not held responsible for any security interests held by other parties prior to the sale.  If you acquired the property in good faith and was not through a fraudulent transfer you should be fine.  However, if the wording in the legal documentation is not clear and you purchased the home you may find yourself dealing with the court system to straighten the situation out from parties trying to come after your newly purchased property.  You may be able to recover the court costs that you received; however, you will not be able to recover your time.  As with a judicial sale need to obtain an executed deed which is satisfactory to convey the title.  This title needs to identify the security interests and who was in charge of selling the home.  Finally, it should be defined that you purchased and received the home after default and all parties had agreed and were aware of the sale.

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