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.
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 because of missed payments, and notifying them of alternative loss mitigation options.
Homeowners then must be given a specified amount of time to make good on any missed payments or appeal against the foreclosure. They will likely also be required to pay late fees in addition to any outstanding balance.
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, whereas 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 approach a lender uses.
The equitable right of redemption enables homeowners to redeem their mortgages by paying off the entire balance of the mortgage before a foreclosure sale. That may be done through refinancing, although obtaining a new loan could be tricky for individuals who already have a home in foreclosure.
A foreclosure can stay on your credit report for seven years, and impact your ability to get another mortgage in that time.
In addition, some states have a statutory right of redemption, allowing homeowners to redeem their mortgages and keep their homes 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. Should, for example, a lender securitize the mortgage, it may have difficulties convincing a judge not to dismiss the foreclosure.