What Is the Right of Foreclosure?
The right of foreclosure describes a lender's ability to take possession of a property through a legal process called foreclosure when a homeowner defaults on mortgage payments. The mortgage’s terms will outline the conditions under which the lender has the right to foreclose. State and national laws also regulate the right of foreclosure.
- The right of foreclosure allows a lender to legally foreclose on a property that is in arrears.
- Exercising the right of foreclosure legally requires giving notice to the borrower and providing the borrower with time to make up missed payments.
- The right of redemption further limits the right of foreclosure by giving borrowers additional opportunities to retain or recover their homes.
Understanding the Right of Foreclosure
Foreclosure occurs because when a person obtains a mortgage to buy a home, the home itself serves as the collateral for the loan. Since the property acts as collateral, the homeowner agrees that they will forfeit ownership of it if they default on their payments. When a home is foreclosed upon, the lender will generally sell the property to recoup money lost on the loan.
A foreclosure can stay on your credit report for seven years, and it can impact your ability to get another mortgage in that time.
Homeowners associations may also have a right of foreclosure, which they can exercise if a homeowner fails to pay their homeowners' association fees or special assessments.
Foreclosure takes different amounts of time depending on the terms of the mortgage, the lender’s motivation to foreclose, and local regulations. In many cases, it may take six months or more.
Once a home has been foreclosed, the lender will likely announce a foreclosure sale. These sales often put the property up for auction to the highest bidder. If the homeowner still lives at the home, they will likely face eviction through an unlawful detainer suit.
Requirements for Exercising the Right of Foreclosure
Lenders must abide by specific procedures for a foreclosure to be legal. Due to protections for homeowners' legal rights in foreclosure, lenders must provide a default notice, alerting a borrower that their loan is in default due to missed payments, then notify them of alternative loss mitigation options.
Homeowners then must be given a specified amount of time to make good on any missed payments and avoid foreclosure. They will likely also be required to pay late fees in addition to any outstanding balance. The homeowners may also use this time to fight the foreclosure.
Types of Foreclosure
The right of foreclosure varies among jurisdictions. There are two different types of foreclosure: judicial foreclosure and nonjudicial foreclosure. Judicial foreclosure requires filing a lawsuit in court. Nonjudicial foreclosure requires a power of sale clause in the mortgage note. Not all regions allow both types of foreclosure, so local laws may dictate which type a lender uses.
The right of redemption allows homeowners in foreclosure to pay a specified amount of money to "redeem" their mortgages, enabling them to keep their homes. The equitable right of redemption allows homeowners to redeem their mortgages by paying off the entire balance of the mortgage before a foreclosure sale. That may be done through refinancing if they're able to obtain a new loan. However, getting a new loan will likely be difficult if they already have a home in foreclosure.
Some states have a statutory right of redemption that allows homeowners to redeem their mortgages after the foreclosure sale. They can do so by paying the foreclosure sale price plus interest and other fees.
Borrowers may also be able to legally fight a foreclosure if their lender does not actually have the legal standing to foreclose. If a lender has securitized the mortgage, they may have a difficult time proving standing. In this case, it is possible that a judge would be able to dismiss the foreclosure.