What is a property foreclosure? What are the two types of foreclosure?
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Technically speaking, it is not a property that is foreclosed, but a loan. However, the effect is essentially the same thing. A foreclosure is an action that is taken by a lender to get redress when a borrower has defaulted on a loan. The lender typically seeks to repossess the thing that was bought with that loan. In the case of property, the lender is trying to retake possession of the home that was bought with the money from the loan.
Most houses are bought with money that is borrowed. People do not have enough money to pay the whole price of the house so they get a mortgage that gives them the money they need. They are then required to make regular payments to pay back the loan. As long as they make those payments, they essentially own the house. However, if they stop paying back the loan, the lender has the right to foreclose their loan. When this happens, the lender takes legal steps to take the home back.
There are two kinds of foreclosure. One is judicial foreclosure. In this type of foreclosure, the lender goes to court to force the return of the property. The other type of foreclosure is non-judicial foreclosure. Here, the lender simply follows steps outlined by law to foreclose the property. The lender does not need to go to court to accomplish this.
n. the system by which a party who has loaned money secured by a mortgage or deed of trust on real property (or has an unpaid judgment), requires sale of the real property to recover the money due, unpaid interest, plus the costs of foreclosure, when the debtor fails to make payment. (Gerald and Kathleen Hill, The People's Law Dictionary)
What Property Foreclosure Is
A property foreclosure is a legal action whereby a lender may reclaim property upon which the borrower has failed to make and/or keep up the required payments. By law, monetary payments are due upon money that has loaned by a lender/lending institution. By law, if a borrow fails to make the contractually required monetary payments, the lender may recoup losses on the loan by claiming the property in lieu of failed monetary payment. This legal act of recouping losses by claiming the property in lieu of monetary payment is called foreclosure.
Before there can be a property foreclosure, there must be a loan made either by an individual or an institution--but usually by a lending or banking institution--to cover the cost of the property to be acquired, since the cost of property is usually beyond the financial means of individuals to pay outright, i.e., most people need financial backing in the form of a loan to be able to acquire property.
Property may be bare real estate where a home, second home, vacation cabin or other structure is to be built, or it may be bare real estate intended for farming or agricultural purposes, or it may be a newly constructed or reused residential home, rental property, multiple unit rental property, commercial or other business related building in either rural (country), urban (city) or suburban (residential near urban) setting.
A contractual agreement is made between the lender and borrower/purchaser with a promise stipulated binding the borrower to pay a given amount of money at given intervals of time over an extended period time. The contractual agreement is called the mortgage (Old French compound word meaning "dead pledge") and the promise to pay is contained in the promissory note (a statement conveying a promise to act in a specified way).
n. a document in which the [purchaser] pledges his/her/its title to real property to a lender as security for a loan described in a promissory note. ... If the [purchaser] (mortgagor) fails to make payments on the promissory note (becomes delinquent in payment) then the lender (mortgagee) can foreclose on the mortgage to force a sale of the real property to obtain payment from the proceeds.... (Gerald and Kathleen Hill, The People's Law Dictionary)
Thus, to foreclose is to state contractually and legally that if payment is not made, then the mortgage holder's (owner/purchaser/borrower's) right to the property and equity of redemption in the property are forever barred and foreclosed.
Types of Foreclosure
There are in fact more than two types of foreclosure. Those who cite two types of foreclosure often mean either (a) judicial and non-judicial or (b) strict and statutory. It may be thought that "strict" foreclosure is synonymous with "judicial" foreclosure in the same way that "statutory" foreclosure is synonymous with "non-judicial" foreclosure, but strict and judicial actually represent different types of foreclosure.
Explanations of Judicial and Non-Judicial Foreclosures
judicial foreclosure: a legal court process through which the lender files a public complaint of non-payment and an announcement of first claim to the property if the borrower/ property holder does not pay what is required (the required amount is called the "cure": the amount that will cure the foreclosure). The lender's complaint asks the court's intervention to allow the lender to foreclose the loan (cancelling any borrower right to or equity in the property) and to take possession of the property as a remedy for nonpayment.
non-judicial foreclosure: specifics are established by state statute but in all cases there is no court intervention; a notice of foreclosure is sent the borrower; a public Notice of Default (default on payments of the loan) may be recorded; a period is allowed to cure the loan (pay the arrears plus fees); if payment remains unmade, a Notice of Sale is (a) mailed to the borrower/owner, (b) posted in public places, (c) recorded with the county recorder, (d) published in newspapers and legal publications; an auction is announced and held and the property is sold to the highest bidder.
[The above taken from "Judicial and Non-Judicial Foreclosure," Mortgage Bankers Association.]
Explanations of Strict and Statutory Foreclosure
strict foreclosure: strict foreclosure is a contractual specification that, should breach of the terms of mortgage agreement arise, the lender has right of possession of the property; the contractual mortgage agreement states that the lender owns the property until the amount lent is paid in full and that any breach of the mortgage conditions will result in the borrower/purchaser's loss of right to and equity in the property; the lender is required by law to prove in a court that the borrower is in default; the court sets a time during which the borrower may pay the amount due; the lender receives full title in the property if the borrower is unable to meet the conditions set out by the court; no sale of the property is required.
If the mortgagor [borrower] does not pay within the time designated, then title to the property vests in the mortgagee [lender] without any sale thereof. (West's Encyclopedia of American Law, The Gale Group)
Strict foreclosure is contractual since conditions of foreclosure reverting ownership to the lender are specified in the mortgage, yet it is also a type of judicial foreclosure since the court must hear proof of default and set the amount and time for payment of debt, though "strict" and "judicial" foreclosures are not purely synonymous terms.
statutory foreclosure, also called non-judicial foreclosure: the difference between strict and statutory foreclosure lies in what the lender is able to do with the property on which payments are in default: strict allows possession of the property while statutory allows sale of the property by auction after a procedure of due process (letter of notice of foreclosure, public Notice of Default, public Notice of Sale)
When the borrower defaults on the loan, the lender issues a Notice Of Default (NOD). Failure to address the default gives the lender the right to sell the property in order to recover their funds. The sale, usually by public auction, is conducted by the lender or a trustee rather than by an officer of the court. ("Statutory Foreclosure," Foreclosure-HQ.com)
Comparison Between Strict and Judicial Foreclosures and Between Statutory and Non-Judicial Foreclosures
strict: lender is owner till paid in full as specified in mortgage; proof to court of default; court appointed amount and time for payment; no sale of property; lender takes possession
judicial: lender files court complaint against borrower claiming default; asks court's intervention to foreclose on the loan and take possession of the property
statutory: no court intervention; lender files a public Notice of Default; failure to pay allows lender to sell the property; usually a public foreclosure auction conducted by the lender
non-judicial: no court intervention; due procedure of notification; letter of notice of foreclosure, public Notice of Default, public Notice of Sale; public foreclosure auction conducted by lender
Statutory and Strict Foreclosure Compared
Statutory foreclosure is so called non-judicial because foreclosure must be done according to the legislative statutes governing each states foreclosure procedures. Statutory foreclosure is "performance of a power of sale clause in the mortgage" and needs no court intervention since state statutes govern procedure ("Foreclosure." West's Encyclopedia of American Law. Vol. 4. Gale Cengage, 2005).
Strict foreclosure is pursuant to a court set amount of payment and time allotted for payment. By failure to meet the court's conditions, the borrower permanently forfeits all rights, equity and interest in the property and incurs fees and court costs. No sale follows because full title and ownership is conveyed absolutely to the lender ("Foreclosure." West's Encyclopedia of American Law. Vol. 4. Gale Cengage, 2005).
Source: "Foreclosure." West's Encyclopedia of American Law. Vol. 4. Gale Cengage, 2005.
Property foreclosure is a situation in which a homeowner is unable to make principle and/or interest payments on his or her mortgage, so the lender, be it a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract. The two types of foreclosure are Judicial and Non-Judicial Foreclosure. Judicial foreclosure is when the lender files a civil lawsuit against the borrower, with the process being handled by the court. Non-Judicial foreclosure process allows a lender to advertise and sell property at a public auction, without the involvement of the court.
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