Bankruptcy

Understanding Foreclosure: Your Loan and Foreclosure Documents Hold the Answers

By Amy Loftsgordon, Attorney

To understand how foreclosure works, begin with the legal papers you signed when buying your home—the contract with your lender and other documents that were presented to you in a seemingly endless progression. The loan contract and other documents spell out the steps the lender must take if it decides to foreclose on the property. This article explains the terms that you’re likely to see in these papers, and shows you their role in foreclosure.

Loan Documents

When a bank loans money for the purchase of a house, the homebuyer must sign documents promising to repay the loan with interest. Additionally, the buyer must agree that the lender can foreclose on the property (take it back) if the buyer fails to keep the loan current (known as “breaching” the contract). If you’re not sure where to find these provisions, you can brush up on your loan document knowledge using the explanations below.

Promissory note. Buying a house requires you to “promise to pay” back the money you borrowed to purchase the home. The promissory note—often referred to as the “note”—is the contract between you and your lender that sets forth the terms of the loan. It’s where you’ll find relevant contract provisions, such as the total amount of money borrowed, the interest rate, the date your monthly loan payment is due, the address where you’ll send your payment, and how much you’ll pay in late penalties if you fail to send in your payment on time. Importantly, the note itself does not spell out the consequences of non-payment beyond late fees—that’s the function of yet another document, explained just below.

Mortgage. It’s common for people to think of the mortgage as the home loan. However, that’s not the case. As discussed above, the promissory note is the loan contract. A mortgage isn’t a loan at all, but a security instrument that guarantees repayment of the loan. The mortgage works by giving the lender a “lien” on your home. The lien allows the bank to foreclose on the property if you fail to make your payments according to the terms of the promissory note. Not all states use mortgages to secure the loan (Wisconsin and Illinois are among those that do).

Deed of trust and the trustee. In states that do not use mortgages to secure the loan (for example, Colorado and California), you’ll sign a different type of security instrument, called a “deed of trust.” The deed of trust appoints an independent person called a “trustee” to hold the title to the property. If the borrower breaches the contract, such as by failing to make a timely payment, the trustee can sell the property at a “nonjudicial” foreclosure sale, which is a foreclosure process that doesn’t involve the court.

The mortgagor or trustor. When you take out a mortgage loan to buy a home (or to refinance), you are the “mortgagor” (the borrower). If you sign a deed of trust instead of a mortgage, you’re considered a “trustor.”

The mortgagee and beneficiary. The “mortgagee” is the lender that provides a mortgage loan. With a deed of trust, the lender is called a “beneficiary.”

The investor. If your bank later sells the loan, the new owner is known as the investor.

The servicer. The servicer is the company that handles the day-to-day management of your account. The servicer processes your monthly payments and handles collection activities if you don’t keep up with the payments.

Foreclosure Notices

The foreclosure notice tells you that your lender plans to start the foreclosure proceedings if you don’t bring your loan current. Although the content of notices can differ depending on your contract and state, they serve the same purpose—notifying you that you must pay your outstanding balance or the bank will assert lien rights. For example, most standard mortgages and deeds of trust require the lender to send a “breach letter” before starting a foreclosure. It’s called a breach letter because the borrower has violated the terms of the contract. Typically, the breach is that the borrower didn't make the payments. The letter will usually give the borrower 30 days to catch up on the missed payments (plus costs and fees). Paying the arrears will prevent the lender from beginning the foreclosure.

Other Foreclosure Documents

Once you receive a foreclosure notice, the documents you’ll receive after that will depend on the type of foreclosure process used by your lender. The laws of your state determine whether your lender has the right to proceed with a judicial foreclosure, a nonjudicial foreclosure, or both.

If your case proceeds to a nonjudicial foreclosure, your case won’t go to court. Instead, the lender must provide you with a notice of sale that alerts you to the upcoming sale date, as well as give you the opportunity to bring your loan current within a specified period. By contrast, a judicial foreclosure goes through the court system. You’ll be served with a lawsuit and, to protect your rights, you’ll need to respond to the suit within the time afforded by your state. (You can learn more about foreclosure by reading What’s the Difference Between Judicial and Nonjudicial Foreclosures?) [LINK]

If you’re facing a foreclosure and want to keep your house, it is important that you understand your foreclosure options. A knowledgeable attorney in your local area can evaluate your case and help you choose the best course of action for you.

To learn more about when you should retain an attorney, see When to Hire a Foreclosure Attorney.

Questions for Your Attorney

  • Can I expect my lender to initiate a judicial or nonjudicial foreclosure?
  • How long can I stay in my house after I receive my first foreclosure notice?
  • What foreclosure notices must my lender give me to comply with my state’s laws and my loan contract?
  • The bank served me with a lawsuit asking for possession of my home—what should I do?

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