A mortgage foreclosure is enforced in accordance to a court supervised foreclosure process, while a deed of trust foreclosure gives the lender the option to bypass the court system altogether by following the procedures outlined in the deed of trust and applicable state laws. This is known as a non-judicial foreclosure or trustee’s sale. If the trustee conducts a foreclosure sale, title is conveyed from the trustee to the new owner or, if there are no bidders at the trustee sale, the property reverts back to the beneficiary (lender). Title is transferred from the trustee to the new owner or lender using a Trustee’s Deed.
This process requires the lender to file a lawsuit in order to obtain a judgment. A judicial foreclosure provides a “right of redemption” to the borrower even after the property is sold at auction. This allows the borrower to repay the lender after the foreclosure sale (within a certain time frame), which varies by state, and reacquire title to the property.
In the non-judicial procedure the lender issues proper notices and follows certain rules, and then if the borrower doesn’t bring the loan current, the property goes to a trustee’s sale. Unlike a judicial foreclosure, once the property is sold the borrowers have no right of redemption.
While the lender and/or state law will ultimately determine which security instrument is used to secure a loan, it is important for investors to understand the differences because it will impact the cost and duration of a foreclosure if the borrower does not repay the debt.