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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Non-Judicial Foreclosure

What it is:

[All of this def is identical to "judicial foreclosure." I don't have a clear sense of what non-judicial is...] A judicial foreclosure occurs when a court allows a lender to seize and sell a borrower's collateral when the borrower has failed to repay the lender. The term is most often associated with real estate.

How it works (Example):

In general, there are eight events involved in a foreclosure (in this example, we assume the borrower has obtained a mortgage for a house from the lender).

1.    The borrower signs a contract agreeing to repay the lender over a period of time, usually in predetermined installments.
2.    The borrower misses one or more payments.
3.    The lender sends the borrower one or more notices of delinquency.
4.    The borrower and the lender try to adjust the repayment schedule so that the borrower is more likely to make at least some of the payments until he or she gets back on his feet. (This process is called special forbearance or mortgage modification.)
5.    The borrower still misses payments.
6.    The lender sends the borrower a notice of default and initiates foreclosure proceedings.
a.    In a judicial foreclosure, a court confirms the amount owed to the lender and gives the borrower a set amount of time to pay up ("cure the default").
b.    In a nonjudicial foreclosure, the loan document authorizes the lender to sell the property to recover the loan balance.
7.    The lender puts the property up for sale and publishes a notice of the sale in the local paper. The notice includes a description of the property, the name of the borrower, and other information. The borrower might file Chapter 13 bankruptcy to stop the foreclosure temporarily.
8.    A public auction occurs during business hours, and the highest bidder is usually entitled to buy the property. At that point, the borrower cannot get the property back unless he or she buys it back.

Why it Matters:

Non-judicial foreclosures happen when a mortgage agreement has a "power of sale" clause that gives the lender the right to foreclose on a property by itself. Without that clause, the lender has to take the borrower to court in order to foreclose; hence the term. Many states require judicial foreclosures.

The foreclosure process can take several months if not years, and it does long-term damage to a person's credit report. It is important to note that foreclosure laws vary by state, and they affect the order or duration of these steps. It is also important to note that the federal Fair Debt Collection Practices Act affects foreclosure proceedings by stipulating the methods lenders can use to go after bad debts.
 

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