Being in first position on a loan -- what is the process of foreclosure?

Question

Can someone explain the process to me of what happens if I lend money to someone and they can't pay?  I would be in first lien position.

Do I go through a long and expensive foreclosure process, or is it relatively straightforward and inexpensive to take the house?

Steve Babiak · Answer

Actually, those suggesting a deed in lieu (DIL) of foreclosure might be giving BAD advice here. If there are any junior liens, and since you state you are the senior lien holder, accepting a DIL would leave all those junior liens in place for you to pay off, whereas foreclosing from the senior-most lien position extinguishes those junior liens.

Jeff S. · Answer

First, you won't necessarily get the house.  If you loaned sensibly, at a low enough LTV, the chances of that are unlikely.  I don't know Ohio specifically, but in general the house will be put up for public auction at a minimum price set by you.  This price would generally include the total amount you are owed including principal, unpaid interest, late fees, as well as any legal and foreclosure expenses.  If you really want out, you could set the price lower, at your discretion.  Anything bid over this amount will go to any junior lien holders, until paid off, and then back to the homeowner.  The high bidder gets the house.

You come out whole at best.  If the maximum bid doesn't meet your reserve, you get the house free and clear of any subordinate liens since everyone below you will be wiped out.  Here you are still responsible for any senior liens, such as taxes.

Don't even think of doing a deed in lieu without doing a thorough title search and speaking to an attorney to make sure this is done properly.  Bad advice indeed.  As @Steve Babiak  said, a DIL simply replaces your borrower with you as the new owner.  Here, you owe everything he or she did since nothing gets wiped out.

Dan Griffin · Answer

Sorry...I need to update my profile.  This is in Ohio.

Chris Martin · Answer

@Dan Griffin The process is codified in NC state law Chapter 45, article 2 http://www.ncga.state.nc.us/gascripts/Statutes/StatutesTOC.pl?Chapter=0045

Basically, the trustee would exercise the power of sale to get the property back. In the general (unchallenged, 'clean' security instrument) case, it's not long and not really that expensive.

Yes, a deed transfer (deed in lieu) is also possible...

Darrell Shepherd · Answer

Yep, depends on the state.  Here in GA its a non judicial process, you run an ad in the paper for 4 weeks and sell it on the courthouse steps in an auction the first Tuesday of the month.  Takes about a month start to finish.  VERY easy to do here.  Other states are not nearly as creditor friendly, you'll want to check in the state the property is located.  Make sure you ask about redemption periods, but I dont think NC has one.

Deed in lieu is voluntary.  That just means they deed you the house so you dont have to foreclose...It sounded like you were considering doing a loan, if that's the case you shouldn't plan on anybody helping you secure you're collateral should things go bad.  Hope for the best, but plan for the worst.

Gautam Venkatesan · Answer

@Dan Griffin

the answers to your question will depend on which state is the property located?

Elio L. · Answer

The easiest way would be to have him transfer the deed to you in lieu of foreclosure the foreclosure process. That would be the fastest, cheapest way to go about things. He'd basically just sign the house over to you.

If he doesn't want to do that, then you need to start the foreclosure process ASAP.

Being in first position on a loan -- what is the process of foreclosure?

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