Foreclosure is the process by which a lender retakes real estate when a borrower defaults on a home loan. In states that allow the use of a deed of trust as opposed to a mortgage agreement, most homes are foreclosed through a process called non-judicial foreclosure. Non-judicial foreclosure, as the name implies, occurs outside of the court system, and is usually much faster and cheaper than judicial foreclosure.
A deed of trust, also known as a trust deed, involves three parties: the borrower (trustor), the lender (beneficiary), and a third-party trustee. In this arrangement, the trust involves the trustee holding the property's legal title as security for the loan until it is repaid. The beneficiary is typically the lender, often a bank or other financial institution, who provides the loan to the borrower. In contrast, a mortgage involves only two parties—the borrower and the lender—and the mortgage involves an exchange where the lender gives funds to the borrower in return for a lien on the property, securing the loan in case of default.
In general, defending against non-judicial foreclosure in court is difficult because you usually must show the court that you will be able to afford to pay off the loan if it is reinstated. This article assumes that you have already sought forbearance on the loan, which allows you to reduce your payments for a period of time until you can start paying in full.
If You Haven't Sought Forbearance...
Call your lender to talk about your forbearance options, which can help you repay the loan by adjusting the repayment schedule. You can also ask your lender—who provided the borrower money to purchase the home and requires repayment under the loan agreement—about reducing your payments through loan modification, a process protected by the federal government under the Home Affordable Modification Program (HAMP).
Below are six helpful ways to defend non-judicial foreclosure.
Table of Contents
1. Unconscionable Terms in the Agreement
You can try to convince a judge that the terms in the legal document—such as a deed of trust or mortgage—signed by both parties are unconscionable, as well as the circumstances surrounding the formation of the document. This requires more than just a one-sided deal and slight unfairness. The document must be grossly unfair to the point that the debtor (borrower), who may be a person or legal entity, has clearly been taken advantage of by the creditor (lender), who may also be a person or legal entity, to the extent that it “shocks the conscience” of the judge. An example would be if the creditor changed important terms in the document without the debtor knowing before signing it.
2. Improper Foreclosure under State Law
State law specifies the procedure that must be followed to properly foreclose on a property. For instance, some states require that the borrower receive a notice of default prior to foreclosure to put the borrower on notice and, in some cases, give the borrower a chance to fix the default. Some states that allow deeds of trust require that the assignment to the trustee be recorded in the County Recorder’s office in order to be enforceable. Therefore, if the deed of trust has not been properly recorded, the court may allow foreclosure to be avoided.
3. Mortgage Reinstatement or Redemption
Another option would be to try for mortgage reinstatement or redemption. These options are statutory rights in many states.
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Mortgage reinstatement: The homeowner pays off all amounts that are past due plus any fees if the lender agrees to stop foreclosure.
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Mortgage redemption: The homeowner pays off the entire outstanding loan.
In most cases, if the homeowner exercises these rights, foreclosure can be avoided.
Often borrowers are required to exercise these rights before the foreclosure sale date, so if that date has passed, you may no longer have these options. If the homeowner does not reinstate or redeem the loan, the trustee may sell the property at a foreclosure sale.
4. Foreclosure Assistance
Check your state’s laws either on the relevant state or federal website as given here for any foreclosure assistance programs it may have. These programs are designed to help eligible borrowers retain ownership of their real property by providing financial assistance to cure their default and get back up on their feet. In some cases, assistance programs may also help with the purchase of a home for eligible borrowers facing foreclosure.
5. You Are on Active Duty
If you are a service member on active duty, the Servicemembers Civil Relief Act (SCRA) offers you foreclosure protection. The SCRA will at least allow you to postpone foreclosure until after you are done with active duty, allowing you time to hopefully catch up on your payments.
6. Filing Bankruptcy
Filing bankruptcy is often an excellent option and should not necessarily be viewed as a last resort. In bankruptcy proceedings, the borrower is referred to as the debtor and the lender as the creditor. When you file bankruptcy, an automatic stay goes into effect that halts any foreclosure action as well as other debt collection activities. You can consult a local bankruptcy attorney for help to figure out whether bankruptcy is right for you.
