Does a foreclosure void a deed?

Visitor Question: It looks like a friend of mine is headed toward foreclosure. He hasn't been able to pay his mortgage regularly since this epidemic began because he lost his restaurant job. Then when everything else was opening up, the restaurant closed and he wasn't able to find a job because there were too many restaurants trying to come back at the same time. He got a little government relief, but it wasn't enough.

I don't understand how this circumstance can lead to his losing his house altogether. He has his deed and showed it to me. Shouldn't a deed be more important than a bank that is somewhere far away and doesn't really need his money? I think he should have to pay interest on what has not been repaid but I didn't know that somebody can make his deed void altogether. This is making me think that my goal of owning a house someday soon could turn into a nightmare.

Editors Reply: Your questions make us think you don't have an exactly accurate picture of what a foreclosure is and what a deed is. We will try to help with that.

First, when you buy a house, unless you can pay cash for it, you have to take out a loan known as a mortgage. A mortgage is a form of contract, and therefore each bank, credit union, or mortgage company that grants mortgages has its own contract. The "terms and conditions" of a mortgage thus vary somewhat.

Also each state has its own laws about how the foreclosure process works. Foreclosure simply means that the mortgage grantor (the business that loaned your friend the money) has started a legal procedure allowed by the state when a borrower fails to make a payment. Broadly, states fall into the category of non-judicial foreclosures, which are usually quicker, or judicial foreclosures, which require that mortgage grantor to prove it is entitled to repayment by basically filing and winning a lawsuit.

It's been taking longer and longer for foreclosures to actually result in sale of the property, to the point where the U.S. average is about 2.5 years after the first notice is given. During this time period, almost always the borrower can continue to live in the house. So this is usually not a sudden, forced relocation.

During this time, the best course of action for the person who is behind on paying their mortgage is to start talking with the mortgage grantor about whether some type of affordable loan modification is possible. From time to time, there are government programs that also help borrowers who are in this situation.

After the sale of the house, either by auction or other method, typically those living in the house still have a very few days to get themselves and their possessions out of the home, but then they have to go. If they do not, law enforcement will get involved and dump their stuff out on the sidewalk.

Except in the case of a cash sale, a deed is always subject to the terms of a promissory note that establishes the conditions of the mortgage. The note establishes certain legal rights for the mortage grantor (also called the mortgagee) because the mortgagee deserves to be protected against the risk that the mortgage grantee (the person who buys the house on credit) will go into default, that is, not make the payments on time.

So that promissory note gives the mortgage grantor/mortgagee/mortgage lender the right to initiate the foreclosure process if one or more payments are not made, and details exactly if and when that process can begin.

When you buy a home, you receive a deed, even if you have a mortgage. However, if you have a mortgage, you also have the promissory note that describes the process by which the bank that loans you the money can in effect receive that deed from you, if you don't pay as required and if the bank has gone through all of the steps required by state law and the mortgage document itself. As we said, the mortgage grantor's interest will be upheld by state law and law enforcement officers will be used if needed, in the event that the foreclosure process is completed without the repayment of the full amount owed being made.

You refer to interest on the unpaid amounts, and indeed the interest, penalties, and fees associated with payments not being made on time will be spelled out also in the mortgage documents and backed by the promissory note itself.

In sum, then, a completed foreclosure process does not void a deed, but it does transfer the deed to the bank or other lender. If a foreclosure process is initiated but never completed because the borrower repays the amount due the lender (or simply because the lender does not follow through on the foreclosure), then the deed remains completely intact.

The best advice for your friend is to not be afraid to try to work directly with the lender, and at the same time to reach out to city government and any private housing advocacy groups that may be active in the area to learn about government assistance that may be available. If there is a housing counseling office in the city where this is occurring, that is probably the best possible source of information and assistance.

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