|
|
Undestanding Foreclosure
by Credit.com
What is foreclosure?
'Foreclosure' is a legal process that permits a creditor (a lender or mortgage
holder) to repossess or sell real property, like a condo, a home, or land,
for the purpose of repaying the debt owed on that property. Mortgage holders
are permitted to foreclose on property anytime after the borrower defaults
on the mortgage, unless otherwise set out in the mortgage or in the laws of
the state where the property is located. Although state laws vary, foreclosure
generally involves the following steps:
- The mortgage holder gives the defaulting property owner a written notice
of default.
- The property owner is given a limited period of time in which to cure the
default and pay all amounts due, including interest, penalties, attorney charges,
and any other fees imposed by the law or the mortgage.
- The lender may pursue judicial foreclosure (which involves filing a lawsuit
in a court) or non-judicial foreclosure, depending upon the laws of the state
where the property is located.
- Mortgage holders usually give property owners the opportunity to cure the
default. Once the time allowed to cure the default passes, the mortgage holder
usually gives notice of a foreclosure sale.
- The property may be sold at public auction where the highest bidder can purchase
the property, or the lender may purchase the property and sell it later in
a private sale.
- An unlawful detainer suit is filed to evict the property owner if he or she
is still living on the property.
Will a foreclosure action wipe out all of a property owner's debt?
Foreclosure actions wipe out some of the property owner's debt, like the original
mortgage (taken out at the time of the home purchase), HELOCs, and second
mortgages. However, property owners are still obligated to pay off HELOCs
and second mortgages in full if they are not paid out of the foreclosure proceeds.
In markets like the one we are now experiencing, where there has been a significant
drop in real estate prices, some properties will be sold for less that the
balance owed on the original loan. If there is no insurance (e.g. PMI) that
covers the difference between what is owed on the property and what it was
sold for, a court could enter a deficiency judgment against the property owner.
Deficiency judgments obligate the property owner to repay the difference and
give mortgage holders the right to collect the remainder of the debt owed
from any other assets the property owner may have.
Mortgage holders' legal obligations in foreclosures:
In most states, mortgage holders, or lenders, have two primary obligations:
- Notice: In most states, the most important part of the foreclosure
process is to provide notice to the property holder. In these states, lenders
are required to (1) provide a homeowner with sufficient notice to allow the
property owner to understand that he or she is in default, and (2) give notice
of the property owner's right to cure the default before the lender can initiate
a foreclosure proceeding. Do NOT bury your head in the sand and ignore written
communication from your mortgage lender. Respond to any notice you receive
as soon as you receive it. Find out the exact details of what the lender believes
you did, or failed to do, and ask what you can do to cure the default.
- Written claims (proof of money owed under the mortgage):
Lenders are also usually required to file statements that itemize the amount
the property owner owes under the mortgage. This amount owed includes the
principal, interest, late charges, attorneys' fees, and any other charges
the lender is permitted to charge under the terms of the mortgage or the laws
of the state where the property is located. In many states, lenders are not
required to send a claim to the property holder.
- Soldiers' and Sailors' relief: Lenders are also required
to certify in writing that the property owner is not a member of the armed
services before initiating a foreclosure action. The Soldiers' and Sailors'
Civil Relief Act is intended in part to protect deployed active duty service
people. If you are a member of the armed services, you should consult an attorney
about your rights relating to foreclosure proceedings.
What if the lender is wrong?
If you think your lender made a mistake because you did not default on your
loan or the amount the lender is claiming is incorrect, contact the lender
and explain in writing why you believe the lender is mistaken. Be sure to
explain clearly why you are not in default and provide copies of any documents
that prove your position. Even if your lender does not agree, you have the
right to go to court and prove that you did not default on your loan. If you
go to court, the documentation you send to the lender will be very important.
You may wish to consult with legal counsel to handle any court appearances
and documentation.
Can I stop a foreclosure?
Legal ways to stop or prevent a foreclosure:
There are basically two legal ways to challenge or defend against a foreclosure.
Technical defenses are defenses to the foreclosure proceeding
itself. One example of a technical defense is if a property owner was not
given adequate notice of the default and proceedings. However, technical defenses
are not very helpful in preventing foreclosures because a mortgage holder
can easily defeat the defense by correcting the procedural defect. In the
example of lack of adequate notice, a mortgage holder can defeat the defense
by issuing a new default notice and beginning the proceedings over again.
Substantive defenses are the best legal way a property holder can stop a foreclosure.
Substantive defenses go to the terms of the mortgage itself. Here are some
examples of substantive defenses to the foreclosure process:
- If you are really not in default, and the debt and interest have been paid
on time (according to the terms of the mortgage);
- The mortgage holder committed fraud in obtaining the mortgage;
- The property owner files for bankruptcy. A bankruptcy filed before the foreclosure
sale will "stay," or temporarily stop, a foreclosure; and
- A property owner can stop a foreclosure process if he or she pays off the
loan and all of the lender's foreclosure expenses and costs.
If you believe
you may have a legal reason to stop the foreclosure, you need to file an objection
to the sale with the court. In most states you can file objections before
the foreclosure sale takes place, after the sale has taken place, or before
the court ratifies the sale, if the sale was improperly conducted.
Practical suggestions to stop a foreclosure sale
- Find out the exact details of what the lender believes you did or did not
do. Ask the lender what you can do to remedy the default. Some lenders will
work with you, so it doesn't hurt to ask.
- Pay the mortgage holder any loan payments you owe, together with any interest,
fees, or late charges incurred by the mortgage holder. Although this is the
most difficult thing to do, it is the best way to prevent foreclosure proceedings.
- If possible, try to work out a compromise (reach an agreement with the mortgage
holder) that will stop the foreclosure proceedings. This may allow you to
stay in your home and protect your credit score. It never hurts to ask your
mortgage holder if you can reach a compromise. Ask:
- If the lender will agree to lower your payments and allow you to pay over
a longer period of time; or
- If the lender will lower your payments in exchange for raising your interest
rates or adding a point; or
- If you can refinance the loan at a lower interest rate in order to reduce
your payments.
- Sell your home so you can keep more of the equity. Locate a real estate agent
that is familiar with foreclosure investing.
- Volunteer to give the house back to the lender. (For more on this topic,
see Deed in lieu of foreclosure in the Glossary).
- You may be able to postpone the proceedings one time, for one day, if you
make a good argument in writing that you can obtain the cash.
Tax issues
There are tax consequences of foreclosure. When a debt is forgiven in a foreclosure
action, taxpayers are considered to have made money. That means that the taxpayer
or property owner not only loses the property, but also may owe taxes on the
difference between what was paid for the property (the value of the home)
and what is owed on the mortgage (but forgiven in the foreclosure action).
These days,
with the large number of mortgage foreclosures and a decline in housing prices,
there are more and more situations where property owners will be responsible
for taxable income resulting from a foreclosure.
Credit.com tips:
- Do NOT bury your head in the sand and ignore written communication from
your mortgage lender. Respond to any notice you receive as soon as you receive
it. Find out the exact details of what the lender believes you did or did
not do, and ask what you can do to remedy the default. Act quickly!
- Find a lawyer to represent you while you negotiate with lenders – it will
ensure the best possible outcome.
- If you can, reinstate the loan and pay all of the loan payments and lender's
costs.
- Filing for bankruptcy should be your last resort. Most homeowners who declare
bankruptcy end up losing their home to foreclosure anyway, and end up with
both the bankruptcy and the foreclosure on their credit reports. If you need
to file for bankruptcy, conduct a bankruptcy attorney. Be aware that you still
may lose your house, and you will have bad credit for at least 7 years.
- Avoid companies which:
- Claim they are mortgage consultants;
- Want you to pay an advance fee before they are able to perform any service
for you;
- Claim they can stop the foreclosure proceeding if you are in default and
rescue your property;
- Take over your house at a discount;
- Tell you to pay the company instead of your lender;
- Tell you to transfer your deed to the company; or
- Anyone who claims they will give you a good deal.
Always check the validity of the company with your State's Attorneys General.
(To find your Attorney General: http:// www.naag.org)
- Never make a verbal agreement.
- Don't refinance your mortgage several times in a short period of time. Each
time you do this, your lender will charge you additional fees, refinance charges,
and points. All of the refinance expenses and fees will be used in calculating
the annual percentage rate of your loan, so you may pay a higher interest
rate.
.
Glossary
Acceleration Clause
Most mortgages have acceleration clauses that allow the mortgage holder to
declare the entire debt due and payable as soon as you default on a payment.
For example, if you have a mortgage on your home for $75,000 and you fail
to make the monthly payment, the lender can demand that you pay the full
amount of $75,000 immediately -- as soon as you miss that one payment.
If a mortgage does not have an acceleration clause, the lender can begin
foreclose proceedings as legally permitted in the state where the property
is situated.
Deficiency Judgments
You as a mortgagor are required by law to pay mortgage insurance (e.g. PMI)
for the length of time the mortgagor's first mortgage is more than 80%
of the value of the property. In a real estate market like the one we are
experiencing now, where housing prices drop, it is possible that the property
could be sold for less than the balance on the loan. PMI will not cover
this deficit, so a lender may ask the court to enter a deficiency judgment
against you. A deficiency judgment gives the lender the right to collect
the difference from your other assets unless the loan is considered a non-recourse
loan.
Foreclosure by judicial sale
A foreclosure by judicial sale is the most common method of foreclosing on
real property. A foreclosure by judicial sale is a process supervised by
the court where property is sold. The proceeds of the sale go to: (1) the
lender, to satisfy the terms of your mortgage; (2) other lien holders,
and (3) to the mortgagor of the property (if there is any money left).
Foreclosure by the power of sale
In a foreclosure by the power of sale, the mortgage holder, or lender, sells
property outside the supervision of a court. Most states permit lenders
to foreclose by selling property because it is very efficient. Like the
foreclosure by judicial sale, the proceeds of the sale go in order to:
(1) satisfy the terms of the mortgage; (2) other lien holders; and (3)
to the mortgagor (if there is any money left).
Deeds in lieu of foreclosures
Some states allow strict foreclosures, or deeds in lieu of foreclosures. In
those states, when a property owner defaults on the terms of the mortgage,
the court orders the property owner to pay the mortgage within a certain
period of time. If the property owner can't satisfy the court order within
that time frame, the lender, or mortgage holder, is permitted to take title
of the property. The deed transfers the property owner's interest in the
property to the lender to satisfy the debt owed. The process can be advantageous
to both parties because:
- Property owners are immediately released the debt and they can avoid the
embarrassment of formal foreclosure proceedings.
- It is also an efficient process for lenders who can avoid expensive court
proceedings, lengthy foreclosure processes, and repossessions.
This type of foreclosure is not attractive to lenders foreclosing on property
if the fair market value of the property is greater than the amount the mortgagor
owes on the property. This is because banks and lenders who bid on the property
at auction usually will not bid more for the property than the amount actually
owed on it.
Mortgage
A mortgage is the written agreement
between a lender and the purchaser of property (“Mortgagor”) and defines the
terms of the purchase of the property.
Points
Points are the commissions or fees you pay your broker, or lender. A point
is equal to one percent of the amount of the loan. If your mortgage is
$300,000 and you pay two points you will pay $6,000 in fees to the broker.
This
document provides details about foreclosure law but it is not legal advice.
Although we made every attempt to make sure this information is accurate,
we recommend you consult an attorney to verify which information applies to
you and is appropriate to your situation.
Return to Top
|
|
|
