Understanding Real Estate Foreclosure Terms
Have you ever thought you knew the definition of a word, but then found out you were wrong? Have you ever wondered if someone really knew what they were talking about, especially when they start using “really big” words? Each industry, whether it is the car industry, the clothing industry or sports, has their own jargon or lingo. Words that are used within each industry that have specific meaning for that particular industry, but make the consumer feel like they really don’t understand. Well, foreclosures have specific words that apply to the process of foreclosure as well. Foreclosures are not an industry all by themselves, but they do fall under the real estate industry, the banking industry and the mortgage industry. Knowing what these foreclosure terms mean will help the consumer when looking for a foreclosure home, talking to an agent or to a mortgage lender. As they say, Knowledge is power!
Bank-Owned Property: This is a property owned by a bank or a lender. This happens when a borrower fails to make the mortgage payments and the property goes to a foreclosure auction. If the property is not sold, it is repossessed by the bank/lender. This is also known as real estate owned (REO).
Complaint: In judicial foreclosures, this is the document that describes why the lender is foreclosing. This document is served on the borrower along with a summons. It begins the foreclosure action.
Declaration of Default: In deed of trust states (non-judicial foreclosure), this is a document that tells a trustee to prepare and record a Notice of Default and sell the foreclosed property at auction.
Deed in Lieu: This is the document that allows a borrower to give ownership of a foreclosed property to the lender as a way of satisfying the unpaid loan to avoid foreclosure.
Deed of Trust: A document that transfers ownership of a property from the borrower to a trustee until the borrower has paid the loan to fully buy the property.
Deed of Trust States: This term describes the U.S. states (non-judicial states) that use deeds of trust to secure a loan.
Defendant: The term given to the borrower being sued in a foreclosure action.
Deficiency Judgment: In some cases a lender can go to court after the completion of the foreclosure process to sue the borrower if the payoff is less than the debt owed. (e.g., Borrower owes $250,000, but property sells for only $200,000).
Foreclosure: This is the legal process a lender uses to take a property from a borrower for non-payment of the loan. Foreclosure rules vary from state to state. Some states (generally states that use mortgages vs. deed of trust states) require lenders to go to court; others don't. In either case, the lender takes the foreclosed property to sell to make its money back.
Foreclosure Auction: The actual sale of the foreclosed property, usually on the courthouse steps in the county where the property is located. In judicial foreclosures, a “referee” is named by the court to hold the sale. The referee then turns the foreclosed property over to the new owner by Referee’s Deed (see Referee’s Deed below).
Full Reconveyance: In deed of trust states, this is a document the trustee uses to release a property back to the borrower after the loan is paid.
Judgment of Foreclosure Sale: In judicial foreclosures, this is a court document that tells the referee to sell a foreclosed property at auction. It also sets the total amount the borrower owes to the lender. This amount covers the unpaid loan, interest and legal fees.
Judicial Foreclosure: When a borrower fails to pay the mortgage for several months, the lender seeks to foreclose on the property by filing a civil lawsuit against the borrower and serving the borrower with a formal summons and foreclosure complaint. This begins the judicial foreclosure process, which is handled through the local court system. The court appoints a referee to conduct the foreclosure auction on the courthouse steps.
Junior Lien: Lien (see Lien, below) filed at the county clerk's office after the deed of trust or mortgage. Liens may be judgments, unpaid taxes, or second and third mortgages. What makes them “junior” is the fact that they are “second” to the primary mortgage.
Lien: A lien is any legal claim upon a property that reveals either a debt or a non-monetary interest in the property. Liens are typically recorded with the clerk of the county in which the property is located.
Lis Pendens (LIS): Also known as notice of pendency, “lis pendens” is Latin for “suit pending.” In judicial foreclosures, this is a “notice to the world” of a foreclosure action. It is filed with the county clerk.
Mortgage: A legal right to a property that a borrower gives to a lender as part of his promise to pay the loan back.
Mortgage States: This term describes the U.S. states that use mortgages to secure a loan.
Mortgage Acceleration: Lender's notice that the entire unpaid balance of a mortgage loan is due because the borrower didn't make his payments.
Non-judicial Foreclosure: May also be referred to as “statutory” or “power of sale” foreclosure. This type of foreclosure does not go through the court system and is allowed if a mortgage or deed of trust contains a power of sale clause. It is usually faster and cheaper than judicial foreclosure. In non-judicial foreclosures, the lender and other lien holders claim the foreclosure sale proceeds in the same manner as they do in judicial foreclosures.
Notice of Default (NOD): In non-judicial foreclosure, this is the official notice (can be a letter) that the lender sends to the borrower letting him know that that the lender plans to foreclose because he hasn't made his payments. The lender may tell the borrower how much he can pay to stop foreclosure and by when. Some states require that the Notice of Default be filed with the county clerk.
Notice of Pendency: See Lis Pendens.
Notice of Rescission: In deed of trust states, the lender gives the borrower this document when the borrower pays back his unpaid loan to stop a foreclosure. The trustee files this document with the county clerk.
Notice of Foreclosure Sale (NFS): Legal document that notifies the public of the date, time and place of a foreclosure auction and the address of the foreclosed property in mortgage states (judicial foreclosure). This document is referred to as a Notice of Trustee's Sale in deed of trust states (non-judicial foreclosure).
Notice of Trustee's Sale (NTS): Legal document that notifies the public of the date, time and place of a foreclosure auction and the address of the foreclosed property in deed of trust states (non-judicial). This document is referred to a Notice of Foreclosure Sale in mortgage states (judicial foreclosure).
Plaintiff: The person who starts a lawsuit.
Power of Sale Clause: Paragraph used in a deed of trust that allows trustees to foreclose without using the courts.
Pre-foreclosure: A pre-foreclosure is a property with late mortgage payments, and the lender has issued a Notice of Default (in non-judicial foreclosure) or a Lis Pendens (in judicial foreclosure) to the borrower. The borrower can still make payments and pay the loan amount due to stop a foreclosure. But, if payments are not made, the lender will move to foreclose.
Publication: The Notice of Foreclosure Sale (in judicial foreclosures) and the Notice of Trustee's Sale (in non-judicial foreclosures) are published in a newspaper for a period of time before the foreclosure auction. Each state has its own publication rules.
Publication Letter: A letter from lender to trustee telling the trustee to prepare, publish and file a Notice of Trustee's Sale.
Real Estate Owned (REO): This term describes a foreclosed property that a bank ends up owning if no one else buys it at a foreclosure auction.
Referee: In judicial foreclosures, the court appoints someone to hold the foreclosure auction. This person is the referee. The court typically chooses referees from a list of local lawyers.
Referee's Deed: In judicial foreclosures, the legal document that gives ownership of the foreclosed property to the person who bids the highest amount of money at a foreclosure auction.
Reinstatement Period: In deed of trust states, this period of time starts when the Notice of Default is filed with the county clerk and ends five business days before the trustee's sale.
Right of Redemption: A defaulting borrower can reclaim his foreclosed property up to the moment of foreclosure auction (or afterward, in certain states) by paying the lender back everything that is owed. Not all states allow this.
Service of Process: A legal term that describes delivery of the foreclosure summons and complaint to the borrower.
Short Sale: A term that describes the sale of a property for an amount less than the unpaid mortgage. This happens when a borrower cannot afford to keep making mortgage payments and cannot pay the difference between the sale price and the unpaid mortgage. The borrower gets the bank to agree to sell the property for less than what is owed – and the bank is “shorted.”
Summons: In judicial foreclosures, the legal document that notifies the borrower of the foreclosure action.
Title Search: A search of county clerk records for all actions involving the foreclosed property. These actions may include judgments and unpaid taxes.
Trustee: An independent entity, usually a title company, which manages a lender's assets for the benefit of the lender. In deed of trust states, trustees hold title to real property in trust as security for repayment of a debt owed to the lender.
How many times have you heard these words and not really understood their meaning? Well, now you know.