An investor friend of mine reached out recently to ask about the non-judicial foreclosure process in Texas. He was moving from New York and looking to relocate to Texas; Go figure.
This stumped me; I have my fair share of dealing with foreclosures here but this was the first time I actually came across this term. Apparently, there are two types of foreclosures laws here in Texas. I was determined to do my due diligence and come back to him with a detailed response.
I reached out to a foreclosure attorney with that exact question. What is nonjudicial foreclosure? In a nutshell, it’s a foreclosure sale that takes place without court involvement.
In this blog, I will go through a detailed explanation of why nonjudicial foreclosures are the most common in Texas.
Nonjudicial Foreclosure Process in Texas
Nonjudicial foreclosure is the most common type of foreclosure sale in Texas. Because the court system does not need to get involved, the timeline actually leading up to the foreclosure happens a lot sooner.
The nonjudicial foreclosure process can be outlined in 4 detailed steps.
- Foreclosure Protection | Loss Mitigation Period: In Texas, the loan servicer must contact you(or attempt to) within 36 days of your first missed payment to discuss ways to mitigate any loss while you are default. Some options include a loan modification, forbearance, or possibly a short sale to clear the loan balance. They are then required to contact you within 36 days again for each subsequent mortgage payment that you missed to encourage ways to help avoid foreclosure. This is commonly known as the pre-foreclosure period.
- Breach Letter: In Texas, foreclosure proceedings cannot be processed until 120 days after the first missed payment. There is a provision in the deed of trust that requires the mortgage company to send a notice called the “breach letter,” as a final warning before officially processing a foreclosure. This is done on the 90th-day mark of the delinquency to give the borrower a final 30 days to try to work out another option to prevent a foreclosure. This is also known as the Notice of default and intent to accelerate the mortgage loan.
- Notice of Sale: After 120 days, the lender can officially begin the legal process to foreclose on your home. They will have an attorney process all the necessary paperwork to put your home in the queue at the foreclosure auction. At this point, there is no real timeline for when the actual auction date will be set and it is based on the timeframe of both the mortgage company and the auction house to set a date. However, once the foreclosure date is officially set, the lender must send you a notice of sale with the date, time, and location of the sale at least 21 days before the official date.
- The Foreclosure Sale: According to the Texas property code, foreclosure sales are held on the first Tuesday of every month between 10:00 am and 4:00 p.m. at the county courthouse. Anyone that shows up(including the lender) will have the ability to bid on the property to purchase outright. In this case, the lender is trying to sell the property for what is owed on the property. There are 3 scenarios that can happen here.
- The lender is the highest bidder and only pays what is owed. The property then becomes “Real Estate Owned”. (REO)
- The property sales for less than what is owed result in a loss. At this point, the lender is allowed to file a deficiency judgment against the borrower to make up for losses.
- If the foreclosure sale price exceeds the outstanding balance and costs, the borrower is entitled to a credit for the difference.
What is a Judicial foreclosure?
The big difference that sets a judicial foreclosure apart from a nonjudicial foreclosure is that the lender has to file a proper lawsuit against the borrower in court, present sufficient evidence to back the case, and deal with the court’s timeline to resolve the matter. Judicial foreclosures (also known as a foreclosure by judicial sale) take a lot longer than non-judicial foreclosures. If contested, they can take upwards of 2 years to resolve.
It is available in all the states but the mortgage contract must not contain the power of sale clause. This is unlikely to happen in Texas as lenders are far less likely to want to deal with a complicated drawn-out process.
There is one type of loan that does require a judicial foreclosure sale and those are property tax loans originated after May 29th, 2013.
Exceptions in Texas
There are a few loans that are considered special cases.
- Home Equity Lines of Credit
- Home Equity loans
- HOA / COA Liens
- Reverse Mortgage
- Property Tax Loans Originated between September 1, 2007, to May 29th, 2012.
Under Texas law, a lender must process a quasi-judicial foreclosure if these types of loans go into default. In addition, a deficiency judgment is not allowed the following foreclosure on these types of loans.
A Quasi-Judicial foreclosure means that a foreclosure sale is processed with limited court involvement. It’s a hybrid between nonjudicial foreclosure and judicial foreclosures.
Quasi-Judicial Foreclosure Process in Texas
Quasi-Judicial foreclosures require one additional step in comparison to a non-judicial foreclosure. During a Quasi-Judicial foreclosure, the lender still has to file a lawsuit with the county court, but a judge is not required in this case. If the court reviews and approves the order
What happens after a Foreclosure Sale in Texas?
Under Texas foreclosure laws, there are a few things that can occur after facing foreclosure. For one, your credit takes a hit and the foreclosure will stay on record for up to 7 years. During this period, it becomes very unlikely that you will be able to be approved for any type of financing in the traditional sense.
Here are some other things you can expect:
A deficiency judgment occurs when the foreclosing party takes a loss during a foreclosure sale. This occurs when the foreclosure sales price does not satisfy the entire balance of the mortgage and the cost of the foreclosure. In this case, the foreclosing party can file a court ruling to go after the debtor for the difference.
Right of Redemption
The Right of Redemption refers to a borrower’s ability to reclaim the property after it has been foreclosed on. This is only applicable to a Tax or HOA lien foreclosure. The redemption period can last up to two years and the previous owner must pay a premium to buy back the property.
According to the Texas tax code, the individual redeeming the property must pay the total cost of the property during the auction sale plus a redemption premium of 25 percent of the aggregate total during the first year of the redemption period or 50 percent of the aggregate total redeemed during the second year.
In many cases, the property owner being foreclosed on are in a state of dismay. In the event that they are still living at the property after the auction is complete, the new owners have the right to begin the eviction process.
People Also Ask
Should I Consult with a Foreclosure attorney?: Yes, Foreclosure lawyers are a great way to learn ways to protect yourself and optimize ways to avoid a foreclosure.
What is one way that a borrower can challenge a nonjudicial foreclosure?: A borrower can challenge a non-judicial foreclosure by filing a lawsuit directly against the foreclosing party.
What if I live outside of Texas?: If the property being foreclosed on is based in Texas, then Texas Foreclosure laws apply to the case.
At the end of the day, Texas nonjudicial foreclosures are straightforward.
For traditional loans (Conventional, FHA, VA, USDA), a borrower can expect to be in pre-foreclosure for about 120 days to try to resolve any deficiencies with the lender. They can expect multiple notices and options to try to remedy the situation during this period.
- Loss Mitigation
- Notice of Default
- Notice of Sale
The borrower has to take action to try to defend against a foreclosure either by reinstating the loan, selling the property, or working with their lender on other options like forbearance or loan modification.