Foreclosure by Judicial Sale

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.

The proceeds from a judicial sale go first to satisfy the mortgage, then to other lien holders, and finally to the mortgagor. 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.

For either judicial or nonjudicial foreclosure to occur, the borrower must default on either their mortgage payments or deed of trust payments. However, the foreclosure process does not begin as soon as a borrower defaults. Rather, 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 sale. In most states, the borrower also has the right of redemption. The redemption period starts after the foreclosure sale and provides the borrower a certain amount of time to buy back their property.

"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 easements, liens, or leases on the property after the borrower executed the mortgage. 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 and Party B decides to foreclose on the property. Party B sells the property to Party D at the foreclosure auction. 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 and normally cannot 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.

Procedure in a Foreclosure by Judicial Sale

State laws vary on the procedure for a judicial sale. 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

When the home foreclosure sale is insufficient to satisfy the mortgage amount, the mortgage holder may bring a deficiency judgment against the homeowner to make up the difference. For example, a mortgage holder of a $10,000 mortgage, who only receives $8,000 in a foreclosure sale, may sue the mortgagor for the remainder of the amount due under the mortgage.

Deficiency judgments are tempered in many jurisdictions by "fair value" legislation. This requires the deficiency to be calculated using 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 $9,000. In that case, the mortgage holder would only obtain a deficiency judgment of $1,000.

Have Questions About Foreclosure by Judicial Sale?

Dealing with judicial sale foreclosures can be confusing and intimidating. Whatever your situation, if you're uncertain of what to do next it might be in your best interest to consult with a real estate attorney. An experienced attorney can guide you through the process, ensure you know what to expect, and help you achieve the best outcome possible. If you have any questions, find a real estate attorney near you.