The foreclosure process is a sequence of events and court proceedings that often have odd sounding names. Let’s try to parse it out. The gist is this: if you are unable to keep up with your monthly mortgage payments, the bank may force a sale of your property and remove you from your home.
The Note, the Mortgage and the Deed
A “mortgage” is commonly understood as a loan for the purchase of a residential home. There are two underlying agreements in the transaction, the note and the mortgage. The homebuyer agrees to borrow money and pay it back over time. This agreement is the note, or promissory note, that each buyer signs at closing. It is similar to any contract to repay borrowed money.
A second important agreement is signed at closing, the mortgage or security agreement. If payments are not made, the security agreement allows the lender to foreclose on the property and force a sheriff sale and remove the owner.
When an individual or family purchases a home with a “mortgage loan” the buyer takes “title” to the property. This is deemed to be home ownership, or “fee-simple” ownership. You get a deed with your name on it, and you are free to occupy the property, rent it to others, or sell it at any time, subject of course to the outstanding amount due on the loan at the time.
When that loan is not repaid, the bank can initiate the foreclosure process.
Default on the Note
When buyers fail to make payments, there is at some point a default on the note. Once there is default, the bank typically has a right to “accelerate” the amount due and begin the foreclosure process.
Notice of Intent to Foreclose
Per the Fair Foreclosure Act, banks should send the homeowner a notice of intent to foreclose. This must include certain information pertaining to the loan and mortgage. If the bank fails to do this, there are certain ramifications which can affect the progress of the foreclosure suit.
This is the beginning of the actual foreclosure suit. The complaint opens up the actual legal case against the homeowner for failure to repay the promissory note. The foreclosure complaint must contain certain specific information and must be “served” on the homeowner, that is physically handed to the homeowner, or in some cases sent by mail.
The homeowner will have 35 days to respond to the complaint and assert any defenses and counterclaims against the bank. If the homeowner fails to do so, the case may be deemed “uncontested” and continue proceeding toward sale of the property, commonly known as a “sheriff sale.”
Homeowners in New Jersey have 60 days from being served with the complaint to apply for court-sponsored mediation. This may be a good opportunity to work out a possible settlement, whereby the terms of the deal may be adjusted or some other deal is struck to resolve the suit.
Entry of Default
If the homeowner doesn’t respond to the foreclosure complaint, the bank may ask the court to enter a “default” against the homeowner for failing to respond. This is the next step as we head toward sheriff sale, and is separate from the contractual default mentioned above.
Motion for Final Judgment
After entry of default, the bank may make a motion for final judgment. The motion must carefully outline how much money is due and owing to the bank by the homeowner, and provide other documentation and certifications. If the bank is not clear and precise here, the motion may be denied. If denied, the bank will get another crack at it, except in extraordinary circumstances.
When the motion for final judgment is granted, the process moves toward sheriff sale. A “writ” or order is issued by the court and sent to the sheriff in the county where the property is located. The sheriff is directed to sell the property at a public auction, pursuant to many rules and laws. If all the rules are met and no settlement is reached in the interim, the property is finally sold at auction.
On the day of the sale or auction, the property is often “underwater” as the term goes. Usually more is owed to the bank than the property is worth. The concept of “worth” being what the property could get on the open market based on an appraisal or estimate.
There is often no bidding on the property, as the winning bidder takes the property subject to the outstanding amount due. If the property is worth less than the outstanding amount due, the bidder would be stuck owing more money on the property than it’s worth. So usually the bank bids on the property for a nominal sum. After 10 days, the property may be legally transferred to the auction winner, and thereafter is often put on the market or held by the bank.
After a sale, the homeowner need not leave right away. The owner is deemed a “tenant” and can stay in the home until formally evicted in a separate legal process.
If you have any questions or would like a free consultation, call my office anytime at 973-953-7797.