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5 Stages Of Nonjudicial Foreclosure (Deed of Trust)
Foreclosure can be generally put into two categories depending on whether real estate loans are secure with deed of trust or mortgage.
The former would result in a nonjudicial foreclosure, while the latter in judicial foreclosure.
Individual states would usually practice one of the two.
When a state uses deed of trust, a trustee would run a auction at the end of the foreclosure process for the benefit of the lender.
Here are the stages of a nonjudicial foreclosure.
The preforeclosure state usually starts with a borrower missing a payment on the loan.
Missing a payment is not the same as a late payment. A late payment is still a payment made, albeit being way pass the due date.
But in such instances, the lender charges a late penalty fee, log it in the borrower’s credit record, and move on.
Missing a payment means that no payment is made at all.
As you might expect, lenders who make money by having borrower make good on their promises to pay take missed payment very seriously.
Because foreclosures can be a very costly and time-consuming process, lenders usually pretend that they didn’t know when they actually do. Hoping that it’s just an oversight on the part of the homeowner and that payment will be promptly made as soon as he realizes his carelessness.
This is why lender grant grace periods when they are not obligated to.
Once a borrower is officially in default of the mortgage, a lender will still want to avoid foreclosure and would be happy to work with a borrower to find a solution to their problems.
This period can sometimes stretch for as long as 3 months.
Sometimes a refinance, loan modification, or short sale will easily resolve the problem.
They are after all in the business of financial services. Not real estate. So foreclosure is often a last resort that they have no choice but to resort to.
If no solution or middle ground can be found from all the negotiation, the bank will regretfully have move on to stage 2.
2) Notice of default
The lender has given up and files a notice of default (NOD) with the county recorder’s office. A copy of the NOD will then be sent by certified mail to the borrower.
Take note that some state have a different name for the NOD. But they essentially mean the same thing.
If the borrower up to this point have yet to take the bank seriously, this notice should serve as a wake up call.
At this stage, the borrower can still legitimately reinstate the loan by making up the payments and late payment charges.
This would be enough to prevent a formal foreclosure.
If not, the foreclosure then moves into the third stage.
3) Notice of sale
If the loan is not reinstated by the borrower after 90 days of the NOD, the plans to force the sale of the property is carried out.
This sale is officially called a trustee’s sale as with a deed of trust state, it is the trustee’s responsibility to conduct the auction for such a sale.
At the same time, the notice of sale is recorded by the lender and the pending foreclosure start to get public attention through advertisements.
This can stretch up to 6 weeks before the next state of the foreclosure.
Depending on which state the event is taking place, sometimes the borrower is still given a fair amount of business days to reinstate the loan.
Either that or the borrower will no longer be able to do that. Instead he has to fully pay off the outstanding balance on the loan.
4) Public auction
At the trustee auction, the lender starts the opening bid amounting to the balance owed by the borrower.
If no investor is willing to go higher than that, the lender will acquire the property.
Should there be interest from prepared third parties and the listing received a higher bid, winning the auction in a bidding war, the winner has to either pay in cash or in verifiable certified funds.
The winner of the auction will then be issued a trustee’s deed by the trustee.
5) Redemption period
At this point, the borrower still have a chance of keeping his home by paying the full amount of the debt owed within the redemption period.
This is because government agencies understand that a home is of priceless value to a family and would provide a homeowner every chance of keeping it.
If the debt is fully settled, then the trustee will “return” the tile of the house back to the owner and refund the money back to the lender or investor.
This also means that an investor who won at the auction will not possess the property until the redemption period is waited out and no action has been taken by the borrower to pay up the debt.
Saying that, not all states have redemption periods in the foreclosure process. In fact, most of them don’t.