Foreclosure occurs when a mortgage lender seizes possession of the piece of real estate for which the borrower has taken out a mortgage. It can only happen when the borrower has fallen way behind on the mortgage payments. During the housing market crisis of 2008 and 2009, there was a lot of news coverage of big banks foreclosing on people’s houses.

Foreclosure is not just for banks and big companies, though. If you have lent someone money to buy a house, and they have stopped making payments, you can file foreclosure to take the house back. Here’s what you need to know to foreclose on a deed of trust.

What is a Deed of Trust?

A deed of trust is like a mortgage loan. The deed of trust secures payment of the loan by pledging real property as collateral. Many people use a deed of trust to secure a loan when lending a family member money to buy a house. The borrower and the lender sign a promissory note and a separate deed of trust. In the note, the borrower promises to give up possession of the house if they stop making payments. The deed of trust also outlines this promise. In other words, the deed of trust shows that the borrower is using the house to secure the loan.

In California, almost every deed of trust has a power of sale clause. This clause says that, if the borrower defaults on the loan, the lender automatically has the right to resell the house at auction.

Overview of California Foreclosure Process

When contemplating how to foreclose on a deed of trust, a lender who is considering foreclosure in California can choose between two different legal processes – judicial or nonjudicial foreclosure. The biggest difference between a judicial and nonjudicial foreclosure is the ability of the lender to pursue a deficiency judgment against the borrower. This would only be important if the value of the property was substantially less than the amount owed on the loan. Typically, a deficiency judgment is only available through a judicial foreclosure. A lender should seek legal advice should they have questions about how to foreclose on a deed of trust and the best foreclosure process to use.

How Foreclosure on a Deed of Trust Works

Most foreclosures on deeds on trust in California are nonjudicial foreclosures. In the nonjudicial foreclosure process, the lender first files a Notice of Default with the county recorder. The Notice of Default includes the following information:

  • The amount of money the borrower is late paying
  • The date by which the borrower must pay the overdue amount

To foreclose on a deed of trust, the lender must send the Notice of Default to the borrower by certified mail. If the borrower does not pay the requested amount within 90 days of the date of the notice, the foreclosure process continues. The Trustee sets a sale date and the next step is an open auction. In practice, it is usually the lender who repurchases it. Once you foreclose on a deed of trust, the lender can start the process to evict the borrower.

Understanding the Parties in the Foreclosure Process

Before you foreclose on a deed of trust you need to understand who the parties are to the process. A Deed of Trust has three parties – the Beneficiary (the lender who made the loan), the Trustor (the person or persons who borrowed the money), and the Trustee (this is typically a title company who makes sure that the loan is paid back.) When a borrower defaults on their loan, it is the Trustee’s responsibility to organize the sale of the property and recover as much of the loan as possible. This process is called “foreclosure.” In foreclosure, after the property sells at a foreclosure sale, the Trustee will pay off the Lender(s). The Trustor (borrower) will receive all leftover funds.

How to Foreclose on a Deed of Trust

There are several steps required to foreclose on a deed of trust. First, it is always recommended to attempt contacting the borrower to reach a resolution to avoid foreclosure. If a resolution is not reached, the following steps outline the process of how to foreclose on a deed of trust and start formal foreclosure proceedings.

Step 1 – Notice of Default

Record a Notice of Default with the county recorder. The notice of default identifies the default amount (the amount that the borrower has failed to pay) and the date on which it must be paid. The Notice of Default must be sent to the borrower by certified mail. The borrower will have 90 days from the date the notice is recorded to cure the default.

Step 2 – Notice of Sale

If the borrower does not pay the balance stated in the Notice of Default within the deadline, the lender can go ahead with recording a Notice of Sale. The Notice of Sale sets a specific “sale date” and allows the trustee to sell the home at auction. The notice must be published once a week for three weeks in a local newspaper.

In addition, the Notice of Sale must be mailed to the borrower at least 20 days before the sale date. It must also be recorded with the county at least 14 days before the sale. It should be noted, however, that the borrower has 5 days before the foreclosure sale to cure the default (the reinstatement of the loan).

Step 3 – Auction

On the date of sale, an auction will be conducted. The successful bidder (usually the lender) will be required to pay the full amount of the bid. The bid is an amount equal to or greater than the amount of the loan that is in default.

Step 4 – Obtain Possession of Property

Once the home is sold, the borrower can be served with a 3-day written notice to quit (move out). If the borrower does not move out during this time, the new owner will have to file eviction proceedings to remove the occupants in the property.

Contact A People’s Choice for help preparing a note and deed of trust or help foreclosing on a deed of trust. Please call 800-747-2780 for more information.