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Bank Foreclosure Laws

Netrajit Laishram Jan 27, 2019
Investing in a foreclosed property comes with the benefit of buying property at a lesser amount than the original price. Foreclosed houses can be purchased for both personal and professional reasons; however, knowledge of bank foreclosure laws would be beneficial when making these purchases.
There are two ways of owning a house. Either, you can build a new house, or purchase a constructed one. Whichever way you choose, buying a new house is expensive. It may not be possible for everyone to purchase it.
For those who are looking to buy an already constructed one, a foreclosed house is a good option. Houses purchased under bank foreclosure are priced much lower than the original price of the house.

What is Bank Foreclosure?

A house is foreclosed by a bank when the owner defaults on the monthly home mortgage payments. When a house is purchased through a part cash or a total cashless transaction, the house itself becomes the security for the loan.
The buyer signs an agreement with the bank regarding the terms and conditions of the payment of the loan. They also sign another agreement for putting up the house as security for the mortgage, thus empowering the bank to gain possession of the house, if the buyer defaults in the payment.
The bank or the lender can call in the loan, whenever a buyer defaults in the loan payment. The bank usually recovers the housing loan, by disposing of the house through an auction or selling it, according to the agreement with the buyer. The act is governed by the home foreclosure law, and the lender has to follow the rules prescribed by the state.

Types of Foreclosure Laws

Foreclosure laws are different in every state, as it depends on the kind of sales instruments followed in the state, which can either be the mortgage type or the deed of trust type. The states that use mortgage, apply the judicial process, by using the court of law. The states that use the deed of trust form, usually follow the non-judicial process.

Judicial Process

The states that use mortgage have to foreclose the house, through the court of law. In this process, a bank or the lender has to prove to the court, that the borrower is delinquent. A lender can apply to the court, only when the lender has discharged all the means to recover the due amount from the borrower.
The lender files a complaint to the court against the defaulter through an attorney. Once the case is proven in favor of the lender, the court allows the lender to initiate the process of foreclosure.
The process starts with a lis pendens, which actually means 'lawsuit pending' notice, filed with the court or the public property department of the local government. This act notifies the public about the case filed against the borrower, and the house that is being foreclosed. Once the foreclosure is confirmed, the house is sold through a public auction.
This kind of foreclosure is usually a very long and expensive process, and the lender can only recover the principle loan amount. If there is any excess left, after the loan is recovered, the money goes to the owner.
If there is still a difference in the recovery amount, the lender can file a 'deficiency judgment' against the remaining amount to be collected from the borrower. Some states provide a reinstatement period during which the borrower can reclaim, even after the house auction, if they are able to repay the loan, including the court expenses and other fines.

Non-judicial Process

Foreclosure, in states that use the deed of trust, are initiated by the lender that include the banks and other commercial mortgage lending firms, without going to the court. This process is based on the law of sales deeds, empowering the lender to sell the property, if the borrower defaults in the payment.
Most lenders prefer this process, as it is processed faster and is less expensive. There is no reinstatement period and the house is put up on sale, without any court procedure. The lender can foreclose a property by just submitting a default notice to the authority, without going to the court.
Here, the lender files a default notice with the county clerk or property records office. Once a notice is served, the lender has to notify the public about the auction or sale of the house, as directed by the authorities. The property is auctioned to the highest bidder, for a satisfactory bid. If the bids are unsatisfactory, the lender retains the property.
This process also allows a lender to file a case of deficiency judgment against the owner, if the sales price is less than the outstanding amount. Most states provide a borrower with redemption rights, wherein the borrower can purchase the property back by clearing the due amount.
Anyone planning to invest in a foreclosed property should have a good understanding of laws regarding foreclosure and the redemption period.