The foreclosure process in North Carolina begins when a borrower fails to make payments on a mortgage loan, or an owner fails to pay property taxes or water/sewer bills, or any other lien holder pursues its right to collect the debt secured by the property.
North Carolina is a title theory state, in which the title to the property remains in trust until the entire loan is paid. The document that secures the title is known as a deed of trust.
Deed of Trust / Non-Judicial Foreclosure
The most common foreclosure method in North Carolina involves a non-judicial foreclosure. Court action is not required like in some other states that involve a judicial foreclosure. In North Carolina, a mortgage lenderpossesses a power of sale when the borrower is delinquent. The mortgage document signed at the time the property was purchased contains a provision known as a power of sale clause. This clause allows an attorney for the lender to foreclose on the property to pay the defaulted loan. The loan is sometimes referred to as a bond.
Even though the majority of foreclosures in North Carolina are non-judicial, most foreclosures begin in a courtroom. The attorney for the lender must initiate a hearing where the clerk of court (not the judge) determines if a foreclosure sale should take place. Notice of the hearing must be sent to the borrower and every party who has a recorded lien or claim on the property. The notice must describe the property, give the name and address of the current lender, describe the nature of the default, mention whether the lender has accelerated the loan, and state any right the borrower has to cure the default. The notice must also mention that the borrower has the right to appear at the hearing to show cause as to why the foreclosure sale should not happen. The borrower does not have to appear at the hearing if they so choose. If the borrower and lender sign a waiver to hold the hearing, then the clerk may skip the hearing and allow the foreclosure sale to be scheduled.
At the hearing, the clerk considers evidence as to whether the debt exists, whether a default has occurred, and whether the lender has the right to foreclose. The clerk can then authorize the foreclosure. Either party may appeal the clerk’s ruling to the judge within 10 days.
Notice of Sale
North Carolina law requires that the attorney for the lender must serve notice to the borrower at least 20 days before the foreclosure sale. That notice must be delivered to all occupants and owners of the property. The notice must include the legal description of the property, not just the mailing address. The notice must be posted at the county courthouse at least 20 days before the sale. The sale date must also be published at least once per week for at least two weeks in a newspaper of general circulation in the county. The last publication of the foreclosure sale must be at least 10 days prior to the sale date.
The foreclosure sale must occur between 10:00 a.m. and 4:00 p.m. It cannot be held on a Sunday, a legal holiday, or any other day when the courthouse is closed. The foreclosure sale could be postponed up to 90 days. A postponement may only be for a good cause, such as inclement weather, serious illness, an excessive number of other foreclosure sales, or another good reason. A notice of the postponement must be posted at the courthouse and announced at the time the sale was supposed to have taken place. Furthermore, each party entitled to a notice of the foreclosure must be orally notified of the delay. The notice will state the hour and date to which the sale has been rescheduled and the reason for the postponement.
Within five days after the foreclosure sale, a preliminary report must be made to the court. The report will state the names of the parties, when the property was sold, the sale price, and the name of the buyer.
North Carolina permits a 10-day redemption period after the foreclosure sale. The borrower may reclaim the property by paying the entire mortgage balance plus all costs incurred during the foreclosure process.
North Carolina has a unique provision that allows people to bid on the property after the foreclosure sale. Within 10 days after the foreclosure sale, a buyer can make an upset bid by offering at least five percent more than the high bidder. The person making the upset bid must tender a deposit to the clerk of court, who may then order a resale of the property. The sale is advertised, and the sale will occur in the same manner as the original foreclosure sale. The property will be sold to the high bidder, who may be the one who made the upset bid or perhaps someone else. Technically, people can continue to submit upset bids, so there could be several sale attempts.
The foreclosure sale proceeds will be allocated to pay the costs of the sale, property taxes, and any special assessments. Then the proceeds will go toward the balance due on the loan. Any additional funds will then go to creditors in order of their seniority. Any remaining proceeds will be sent to the borrower or their estate if they are deceased. Any party wishing to contest the distribution of the money may request a special proceeding.
Final Report and Account
A Final Report and Account regarding the sale and the distribution of the funds will be delivered to the clerk of court within 30 days, but only after receipt of the buyer’s money. The clerk will check the report and record it in the public records. At that time, the sale is final.
Some foreclosures in North Carolina may involve the courts, so there are instances of judicial foreclosure in the state. This foreclosure by action involves the attorney for the lender filing a complaint in the court along with a lis pendens, which is a notice of an impending lawsuit. Judicial foreclosure may be necessitated by a title issue or by the seller challenging the foreclosure in court. If the court does order the foreclosure sale to occur, the Sheriff’s department must oversee the auction of the property.
In some cases, the lender may sue the borrower for amounts owed on the original loan after the proceeds from the foreclosure sale have been applied to the debt. The amount recoverable by the lender is limited by the fair market value of the property. The former borrower may provide proof that the property was sold for fair market value to contest the lender’s claim to collect the deficiency. The lender’s right to sue for a deficiency may be affected by the type of loan, when the loan was made, the amount of time that has passed since the sale, the fair market value of the property, what the property sold for, whether the property was the borrower’s principal residence, and whether the borrower is a military service member on active duty. If you have questions regarding whether your lender could pursue a deficiency judgment, consult your attorney.