Foreclosure by Judicial Sale

The last thing a homeowner wants is to watch someone else sell their home. Foreclosure is hard for many reasons. For one, it can be hard to understand the process and what a foreclosure sale will mean for your finances.

Whatever your situation, it might be in your best interest to consult with a real estate attorney. A lawyer can help you understand what you can do when facing foreclosure. In some cases, homeowners have options to avoid a judicial foreclosure.

Judicial Sale vs. Nonjudicial Foreclosure

Foreclosure by judicial sale involves the sale of the mortgaged property under the supervision of a court and is available in every state. In fact, it is the required method for foreclosure sale in many states.

In contrast, non-judicial foreclosure, or foreclosure through the power of sale, allows the mortgage lender to conduct the foreclosure process without using the court system. But the borrower must agree to a non-judicial foreclosure action via a power of sale clause in the initial mortgage documents.

What Happens Before a Judicial Sale?

For either judicial or nonjudicial foreclosure to occur, the borrower must default on either their mortgage payments or deed of trust payments. But the foreclosure process does not begin as soon as a borrower defaults.

First, the lender must give the borrower a certain amount of time to make up the missed payments before starting the foreclosure process. The lender must also send a notice of default to the borrower, as well as a notice of the sale.

What Happens to the Money From a Judicial Sale?

The proceeds from a judicial sale flow as follows:

1. First to satisfy the mortgage
2. Then to other lien holders
3. Finally to the mortgagor (borrower)

Foreclosure by judicial sale requires the mortgage holder (bank or other mortgage company) to proceed carefully to ensure that all affected parties are included in the court case. This ensures that the new owner of the foreclosed property receives a valid title to the real estate.

Bringing a Judicial Foreclosure Action

When a lender seeks to start a foreclosure by judicial sale, the court will require it to follow several steps. This process includes notifying relevant parties, such as other lenders. The two types of parties who may be part of a judicial sale are necessary parties and proper parties.

“Necessary” Parties in a Foreclosure by Judicial Sale

A mortgage holder bringing a suit for foreclosure in court must join any “necessary” parties to the case.

To understand what a necessary party is, it helps to remember that the purpose of a foreclosure sale is to sell the property as it was when the mortgage was first taken out. Before the property can be sold at a foreclosure auction, the mortgage holder must give notice about foreclosure proceedings to anyone interested in the property.

Necessary parties include those who have acquired the following on the property after the borrower executed the mortgage:

• Easements
• Liens
• Leases

They can be added or “joined” to the case as parties without their consent. The intent is to terminate their interest in the property. If a party is not joined, their interest in the property will remain on the title.

For example, Party A takes out a mortgage from Party B and then takes out a second mortgage from Party C. Party A defaults on Party B’s mortgage, so Party B decides to foreclose on the property. Party B sells the property to Party D at the foreclosure auction. But Party B must extinguish Party C’s interest in order to sell the property to Party D. Otherwise, Party C can enforce its mortgage on Party D.

“Proper” Parties in a Foreclosure by Judicial Sale

The other type of party involved in a foreclosure case is a “proper” party. A proper party is a party that is useful, but not necessary, to a foreclosure case.

An example is a party who had an interest in the property before the mortgage was executed. Since this party is not affected by the foreclosure, the individual is considered a voluntary party. Normally, they can’t be court-ordered to join the case.

Sometimes courts will require these parties to be joined anyway to clarify their status with respect to the mortgage being foreclosed upon.

Judgment of Foreclosure

Once all parties have joined the lawsuit, the court will decide whether to approve the foreclosure action. If the court authorizes foreclosure, it will begin the sale process.

It’s important for homeowners to consider all options for avoiding foreclosure before this point. After the judicial sale, the new owner can pursue an eviction.

But in most states, the borrower also has the right of redemption. The redemption period starts after the foreclosure sale. It provides the borrower a certain amount of time to buy back their property.

Foreclosure by Judicial Sale Process

The procedure for a judicial sale varies by state laws. Generally, laws call for either a court-appointed official or a sheriff to conduct the actual sale of the property. This is also called a sheriff’s sale.

The mortgage holder can bid for the mortgaged property. But the highest bidder will receive the rights to the foreclosed real estate.

If a lien holder — who acquired the lien after the mortgage was executed — is not named as a party in the foreclosure, the individual can either foreclose the lien or redeem the lien. If the lien holder chooses to redeem the lien, they can acquire the property by paying the purchaser the mortgage debt.

The property purchaser also has the option of paying the lien holder outright for their interest in the property. They can also re-foreclose on the original mortgage to eliminate the junior lien holder. In this case, there would be another foreclosure sale.

Deficiency Judgments

The sale itself isn’t always the end of foreclosure. A home foreclosure sale might be insufficient to satisfy the mortgage amount.

In that case, the mortgage holder may bring a deficiency judgment against the homeowner to make up the difference. There are two ways to calculate the deficient amount.

Based on Mortgage Debt

The first way to determine how much a homeowner still owes is to use the mortgage balance. For example, a mortgage holder of a $100,000 mortgage only receives $80,000 in a foreclosure sale. They may sue the borrower for the remainder of the amount due under the mortgage, which is $20,000.

Based on Fair Value

Many jurisdictions use “fair value” legislation to temper deficiency judgments. This deficiency calculation uses the difference between the mortgage debt and the fair value of the real estate.

In the above example, a court in a fair value jurisdiction might determine that the fair value of the property was only $90,000, which is $10,000 less than the sale proceeds. They must subtract that difference from the borrower’s mortgage deficiency. The mortgage holder would only get a deficiency judgment of $10,000.

Protect Your Rights in a Foreclosure by Judicial Sale

Dealing with judicial sale foreclosures can be confusing and intimidating. You may want legal representation to consider all available options.

An experienced attorney can:

• Guide you through the process
• Keep you informed so you’ll know what to expect
• Ensure the lenders or lien holders are respecting your rights
• Recommend alternatives to foreclosure
• Help you achieve the best outcome possible

If you have any questions, find a real estate attorney near you.