Judicial Foreclosure
A judicial foreclosure is a judgment ordered by a court in favor of a lender, ruling that the real property securing the debt should be sold under the foreclosure proceedings in order to satisfy the debt. This method is practiced in lien theory states, or those that use a mortgage to secure a lien against real property. The lien theory requires that a borrower hypothecate, or pledge, title to the property to the lender and that in the event of default, the lender, through court action, seek repayment from the borrower. The judicial foreclosure process is used in those states recognizing mortgages as the primary legal instrument securing a lender’s interest. A judicial foreclosure is a process involving the courts and is typically more cumbersome and costly than a non-judicial foreclosure. Furthermore, under this method lenders or lien holders are only allowed to recover the amount actually owed to them. In other words, lenders are not allowed to profit from the sale. Any overage that may occur because of competitive bidding must be returned to the original owner or borrower.
Non-judicial Foreclosure
A non-judicial foreclosure, unlike a judicial foreclosure, does not occur in a courtroom in the presence of a judge, but instead, occurs in the presence of a third-party trustee as previously set forth in the deed of trust. This method is practiced in title theory states, or those that use a deed of trust to secure a lien against real property rather than a mortgage. Recall that in title theory states, the deed is placed in trust with a third party until all terms and conditions contained in the promissory note have been satisfied. If at any time the borrower becomes delinquent on the loan, the beneficiary can instruct the trustee to file a notice of default in the county in which the property exists. The deed of trust contains a power-of-sale provision that expressly authorizes the lender to sell the borrower’s property through a trustee rather than a judge. The primary advantage of using a trustee rather than a judge is the ease with which this can be done. Again, filing a legal suit through the judicial court system can be both a lengthy and a costly process.
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