Generally, yes. If you own the note and the mortgage or deed of trust that secures it, and the borrower is in default, the right to foreclose passed to you with the loan. You have to be able to prove you own it, and you have to follow the steps the loan documents and state law set out.
Where the right comes from
Two documents work together. The promissory note is the borrower’s promise to pay. The security instrument, a mortgage or a deed of trust depending on the state, pledges the property as collateral and says what the lender may do if the promise is broken.
When a note is sold properly, both are transferred to the buyer. You step into the original lender’s position with the same rights and the same limits, and no more than the seller had. A lien that was second in line for the seller is second in line for you.
Look in the security instrument for an acceleration clause. It lets the lender declare the whole balance due after a default, where otherwise only the missed payments would be owed. Foreclosure is the process of enforcing that demand against the property.
What you will have to prove
A court or a foreclosure trustee will want documents showing the loan is yours. Be ready to produce:
- The original note, endorsed to you or in blank, or an accepted substitute if it is lost.
- The recorded mortgage or deed of trust.
- A recorded chain of assignments from the original lender to you with no missing link.
- A payment history that shows the default and the amount owed.
- Proof that the notices required by the documents and the law were sent.
Every item on that list should already be in the collateral file you reviewed before funding. A gap that looked like a filing detail on the day you bought can stall a foreclosure years later.
Judicial and non-judicial foreclosure
| Judicial foreclosure | Non-judicial foreclosure | |
|---|---|---|
| How it runs | You file a lawsuit and a court orders the sale | A trustee sells the property under a power of sale written into the security instrument |
| Commonly paired with | Mortgages | Deeds of trust |
| Court involvement | From the start | Generally only if the borrower challenges it |
Which route is available depends on the state and on the wording of your documents. Some states allow both. Ask a foreclosure attorney in the state where the property sits.
A land contract works differently. The seller keeps title until the contract is paid, and the remedy may be forfeiture in place of foreclosure. See foreclosure vs forfeiture.
What you get at the end
Foreclosure forces a sale of the property, and what reaches you depends on the bidding. If someone else bids, you are paid from the sale price, up to what you are owed, after anything that ranks ahead of you. If nobody bids enough, you take the property by bidding the debt you are owed. From then on you own real estate, with the repairs, taxes, insurance and resale that go with it.
Position decides how much of a sale price is yours. Unpaid property taxes generally come first, and this is where the difference between a first lien and a second counts: the holder of a second sees nothing until the first has been dealt with. Some states also give the borrower a period after the sale to buy the property back, and the rules on pursuing the borrower for a shortfall vary.
What can slow or stop it
- The borrower catches up. The documents or state law may allow reinstatement up to a set point in the process.
- Bankruptcy. A filing generally pauses the process until the court allows it to continue.
- Consumer protections. A loan on an owner-occupied home can carry extra notice and review steps.
- A contested case. The borrower may dispute the amount, the notices or your ownership.
- Your own paperwork. A missing assignment or a lost note has to be cured first.
Who runs it
A local attorney or trustee runs the foreclosure, and your servicer supplies the payment history and the notices. Your part is to decide whether to start, to fund the costs, and to keep deciding as offers to settle come in. A borrower who reinstates or agrees a workout after the process begins may leave you better off than a completed sale would, so keep the milder options from what happens if the borrower stops paying open while the case runs.
The question to ask before you price a note
Before you bid, confirm the state, the security instrument and the lien position from the documents themselves, on a note we send after you join the buyer list as much as on any other. Then ask a foreclosure attorney in the property’s state what enforcing this loan would involve and what it is likely to cost. The answer belongs in your price, together with the results of the other checks in the investor guide.
Related questions
Do I need the original note to foreclose?
Expect to be asked for it, or for an accepted substitute such as a lost note affidavit. What is required differs by state and by whether the foreclosure goes through a court. Confirm where the original is before you buy.
Can I foreclose on a second lien?
Generally yes, but the first lien stays in place ahead of you. A buyer at your sale takes the property subject to it, and the first lien holder's own foreclosure can wipe your lien out. That makes the equity behind a second lien the deciding figure.
Will I end up owning the property?
Possibly. If no one bids enough at the sale, the property comes to you as the lender. You then have to insure, maintain and sell it. Decide before you start whether that is an outcome you can carry.