Ultimate Guide to Foreclosure
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What is Foreclosure?
Foreclosure is the process of taking possession of a mortgaged property as a result of the mortgagor’s failure to keep up mortgage payments. Foreclosure by sale occurs when property is sold at a public auction to satisfy the debt on the home, either in whole or in part. A foreclosure occurs when a property owner is behind on making payments on the mortgage, leading to the property being seized or sold.
There are two types of foreclosures - judicial and nonjudicial. A judicial foreclosure requires the lender to go through the court system to take back ownership of the property. A nonjudicial foreclosure occurs when the lender follows a state-specific foreclosure process without the court’s involvement.
Judicial Foreclosures. A judicial foreclosure begins when a lawsuit is filed in state court with the foreclosing party as the plaintiff. The property owner will be served notice of the complaint and will be given a time constraint wherein they can issue a response to the lawsuit. If no response is filed, or the response is not timely, the court will grant a judgment in favor of the plaintiff and set a sale date for the property.
The foreclosing party generally must provide public notice of the foreclosure sale of the property in a local newspaper for a statutorily required period of time before the sale. The foreclosing party must also provide the property owner a copy of the notice. The property will then be sold in a foreclosure auction which is described in further detail below.
Nonjudicial Foreclosures. In nonjudicial foreclosures, the court is not involved in the process. The foreclosing party must take one or more of the following steps as required by each individual state:
- mail notice of default and provide a date when payment is required;
- notice of default must be recorded in the recorder’s office for the county; and,
- mail notice of sale that tells you the date the property will be sold in a foreclosure auction.
What Is Foreclosure by Judicial Sale?
Foreclosure by Judicial Sale occurs when the sale of a mortgaged property is conducted under the supervision of the court. The proceeds of the sale go first to satisfy the mortgage debt remaining, then to satisfy other secured lien holders, and finally to the mortgagor (borrower). Foreclosure by judicial sale required the mortgage holder to proceed carefully to ensure that all affected parties are included in the case and put on notice of the sale. Without this important step, the purchaser of the foreclosed property may not receive marketable title as encumbrances would exist on the property.
The important elements of a judicial sale are the “necessary parties” and “proper parties.” The necessary parties are those parties that must be included in the foreclosure proceedings. These parties typically have acquired an interest in the property after the initial mortgage was taken out. These parties must be named in the case, even without their consent. Proper parties in a judicial sale are parties that have obtained an interest in the party before the mortgage in question was executed. Proper parties are not essential to the foreclosure process and are normally not affected by the outcome of the suit. However, some courts will require a proper party to be named in the case.
When the property is sold, if the proceeds from the foreclosure sale are not sufficient to satisfy the required debts of the mortgage obligation and the liens on the property, then the resulting judgment is called a deficiency judgment. When this occurs, the lender may file a deficiency judgment against the borrower to recover back the money they were unable to receive from the sale.
What Is a Typical Foreclosure Process?
While the foreclosure process varies from state to state, there are some aspects of the process that remain the same. The foreclosure process typically lasts up to six months.
Pre-Foreclosure. The stage of pre-foreclosure occurs where the property owner fails to make anywhere from two to three mortgage payments. The pre-foreclosure stage is the period between the time in which a Notice of Default or lis pendens has been issued to the homeowner and after the property is sold at a foreclosure auction. The bank or mortgage lender initiates the pre-foreclosure stage. Pre-foreclosure formally begins when the mortgage lender files a “default notice” for the property. This notice informs the homeowner that legal action, typically a foreclosure, will occur if the debt is not paid, typically within 30 days.
Notice of Default. After the initial notice is provided to the homeowner that their payments are late they are deemed to be in pre-foreclosure. After 90 days of nonpayment by the property owner, the foreclosure process becomes a legal process. The bank or mortgage lender will issue a notice of default to a local sheriff to deliver to the property owner. The notice of default is recorded and a date set for the foreclosure auction. A notice of default also paves the way for investors and other homeowners to consult a short sale on the property.
Foreclosure Auction. Once a home has been foreclosed upon, the foreclosing lender will typically set the property to be sold in a foreclosure auction. Foreclosure auctions can be held on courthouse steps, in convention centers, and sometimes even at the property in foreclosure. When bidding on a foreclosed home at a foreclosure auction, the interested buyers typically do not get an opportunity to get into the home. There are no guarantees about the condition of a foreclosed property; therefore, buyers often must make guesses as to the value of the property versus the possible damage that may be awaiting them once they get inside the property.
Types of Foreclosure Auctions:
- Minimum Bid Format. In a minimum bid format, the seller sets the minimum bid and public bids are taken from there until the highest bidder wins.
- Absolute Auction Format. In the Absolute Auction Format, the home is sold to the highest bidder, regardless of the price.
- Auction Reservation Format. In the auction reservation format, the seller of the auctioned home may reject the sale for any reason. This is typically not conducted however, as since the home in foreclosure, the seller has no choice but to sell.
When a person buys property at a foreclosure sale, all junior liens other than property taxes are wiped out. Priority of liens is determined by the date of recording.
Post Foreclosure. In the post foreclosure, the lender has already taken control of the property. If the home did not sell in the foreclosure auction, it will be in the possession of the lender’s REO (Real Estate Owned) department. If it did sell at the auction, it will be in the possession of a new owner or the investor that purchased the property.
If you wish to make an offer on a home that is in the possession of the lender’s REO, this is a great opportunity to negotiate to purchase the property. Lenders are willing sellers as an REO is symbolic of making bad lending decision. If the property is in the possession of an investor, as opposed to a property owner, you may be able to make an offer on the property.
What Is a Right of Redemption?
A right of redemption is a specific time period given to borrowers in foreclosure wherein the owner has the option to buy back or “redeem” their foreclosed property. “Redeeming” can mean either of the following:
- paying off the total debt owed on the property, including the principal balance and any additional costs and interest, before the sale in order to stop the property from being foreclosed upon; or
- paying off the purchase price, plus certain costs and interest, after the property has been foreclosed upon to reclaim the property from the purchaser, investor, or REO.
When a property owner has the right of redemption before the foreclosure sale, the owner is given one last change to keep their home, even though they have defaulted. In order to escape foreclosure and keep their home, the owner must pay off the entire underlying debt, plus interest that are due at the time the property is redeemed. The time period for redemption is typically anytime after the property has been foreclosed and before the foreclosure auction. This type of redemption is rare, however, because if the property owner has the money to pay off the debt before the auction, they likely would have had the money to make their mortgage payments in the first place.
A statutory right of redemption is a little different. With statutory rights of redemption, property owners are given a little more time to redeem their home before the foreclosure sale. Each state has their own statute that provides the additional amount of time that is afforded to property owners to redeem the property following the foreclosure sale. Depending on the statute in your state, the statutory right of redemption grants the property owner a certain period of time after a foreclosure during which they may reclaim their property and pay the foreclosure price in addition to other costs. This statutory right of redemption is beneficial to property owners because it gives the borrowers more time to obtain the funds needed to reclaim their home. It also gives the property owner additional time to find another place to live before they can be evicted.
Can A Judgment Creditor Foreclose On My Home?
If a property owner is involved in a lawsuit and loses for a sum of money, the prevailing party is granted a judgment. If the judgment is not paid, the prevailing party may obtain a judgment lien, which is a lien that will attach to real estate that you own. For example, a judgment creditor may attach a lien on the property owner’s home and could force a sale of the property to get the money for their judgment.
The judgment creditor may be paid when the debtor sells or refinances their home. However, if the creditor decides not to wait for a sale or refinance, they may execute a lien on the property and ask the court for permission to sell the property for the purpose of obtaining their judgment.
However, many states offer a Homestead Exemption. If your state permits certain property to be exempt from creditors, this is a homestead exemption. Most states provide for a homestead exemption if the house is the debtor’s principal dwelling, the house that the defendant is living in at the time the lien attached to the property. In order to qualify for the Homestead Exemption, the judgment debtor must have resided continuously in the residence after the lien was attached.
What Are The Notice Requirements For Foreclosure?
Notice requirements for foreclosure will vary from state to state, so it is important to be aware of the statutory rules regarding notice for foreclosure. The importance is to ensure that you are provided sufficient notice, and that you are aware of the amount of time you have to prevent the foreclosure auction from taking place. If there are procedural errors in the notice provided to you regarding your foreclosure, you may be able to use that as a defense against the foreclosure proceedings.
What Steps Can I Take To Avoid Foreclosure
There are many steps that a property owner can take to avoid the stressful and emotional path of foreclosure.
Make Your Payments On Time. One obvious step to avoid foreclosure is to make your mortgage payments on time and never fall in default for three or more payments. Often, many people fall behind on their mortgage payments because they have lost employment, or other issues have arose in personal life where their earnings are invested in other more important areas. If you have missed three or more payments, these options may be more helpful to you.
Attempt to Refinance. If your mortgage balance is near or less than what your home is worth in the present market, it may be worthwhile for you to consider refinancing your home. If you are able to refinance your home, you may get a lower interest rate, lower your monthly payment, avoid a payment, or even receive some cash at the time you refinance.
The first step in looking at whether refinance is an option is to work with a reputable mortgage broker or lender. Additionally, some nonprofits and government lenders offer to refinance mortgages for property owners who are experiencing financial difficulties. The Federal Housing Administration (FHA) also has set aside billions for the purpose of refinancing the loans of borrowers who have fallen behind on their mortgages.
Call Your Lender. Make a persuasive and thorough call to your lender to ask for a loan modification. It is possible that your lender may work with you to work out an option that will help you present foreclosure.
Increase Your Cash Flow. You may want to consider taking a second job or taking in a tenant that could help with the mortgage payments. Additionally, you may want to consider selling items in your home that you don’t need or use. For example, you may want to sell a spare care, computers, and other valuables that do not hold sentimental value but may help you get out of the financial hole you are in. You may also consider slashing home expenses, like reducing your cable bill, getting rid of extravagant expenses spa treatments, massages, and dining out. Cutting expenses like this may prove to your lender that you are making efforts to work through your financial troubles so that you do not fall into default.
Seniors. If you are a senior citizen over the age of 62, you may have additional options to avoid foreclosure on your home. Reverse mortgages and advances on your future appreciation are options that may unlock some additional equity in your home. These programs all have serious implications. It’s important to consult with your children, financial advisor, CPA, and estate planner before making any decisions.
Sell Your Home. If you are unable to make your mortgage payments, you may consider selling your home before you fall behind on your payments. The best option is to find a real estate agent that is able to sell homes quickly. The faster your home sells, the less damage will be done to your credit.
Defenses To Foreclosure
In the past, successful defenses against foreclosures were rare. However, this is rapidly changing as after the Mortgage Crisis of 2008. This change is due to the fact that since the real estate market crash, more evidence has been discovered exposing the real estate industry to engaging in fraudulent and predatory practices. If you choose to raise a defense to your foreclosure, most courts require that the action be raised in a court of law for a judge to decide (i.e., foreclosure cases do not often involve a jury).
Foreclosing Party Cannot Prove It Owns the Mortgage. The mortgage holder is the only person who may bring a foreclosure action against you. Many mortgages have been sold and bought by multiple different banks, lenders, and investors. It may be difficult to determine who actually owns the mortgage. If the party cannot prove they own the mortgage, then your foreclosure defense may be successful.
Foreclosing Party Did Not Follow State Procedures. If the foreclosing party does not follow the correct procedure in the state where you live, it may be possible for you to challenge the foreclosure. If the challenge is successful, the court will require the foreclosing party to start the entire process over.
Mortgage Servicer Made a Serious Mistake. Mortgage servicers are parties who contract with banks and other lenders to receive and disburse mortgage payments and enforce a mortgage. If a mistake is found in the handling of your mortgage you may be able to successfully defend your claim against the foreclosure.
Terms of Mortgage Unconscionable. A homeowner can raise this defense by arguing that the terms of their mortgage are unconscionable. In other words, the terms of your mortgage, or the circumstances surrounding your mortgage, are so unfair that they “shock the conscience” of the judge hearing your case. These circumstances will vary from case to case and will be determined on a case by case basis.
The Lender Engaged in Unfair Lending Practices. If the lender violated federal or state law designed to protect borrowers from illegal practices you may be able to fight your foreclosure. The important acts to read are the Truth in Lending Act (TILA) and an amendment to TILA terms the Home Ownership and Equity Protection Act (HOEPA). Violations to TILA occur when disclosures regarding the annual percentage rate (APR), the finance charge, amount financed, total payments, and payment schedule are not disclosed. Violations to HOEPA occur when lenders fail to comply with various notice provisions and are prohibited from using certain mortgage terms.
Service member on Active Duty. The Service members Civil Relief Act (SCRA) provides a person on active military duty with special protections. If a mortgage was taken out while you were on active duty, your foreclosure must take place in court even if the laws of your state do not require it. Furthermore, if a foreclosure is initiated while you are away on active duty, you receive a postponement of the proceeding by requesting it from the court.
What is Foreclosure Fraud?
Foreclosure fraud is more prevalent due to the fact that many homeowners remain in difficult financial situations. Foreclosure fraud can be in the form of any scam or scheme that attempt to “help” the homeowner with their mortgage payments or loan. This type of foreclosure fraud can get the homeowner into deeper financial difficulty than they were in before.
Foreclosure Bailout Schemes or “Equity Skimming”. These types of foreclosure fraud schemes occur where a person pretends to be a prospective buyer and approaches a homeowner who is facing difficulty making their mortgage payments. This person offers to help them by paying off the mortgage or paying a sum of money if the property is sold. They will then ask the owner to move out so they can rent the property out. Rather than do what they promise, the fraudulent schemer will never make any payments and will allow the home to fall into foreclosure.
Hidden Balloon Payments. In these schemes, a lender offers the buyer a discounted mortgage refinancing plan which appears to be advantageous to the stressed homeowner. However, although these plans equate to lower monthly payments, the homeowner is only paying interest each month. After the time period where the term ends, the homeowner will be required to pay back the entire balance of the loan in one lump sum payment, or a “balloon payment” to avoid foreclosure. More often than not, the homeowner is not able to afford the entire balloon payment and will face foreclosure.
Obtaining a Deed through False Claims. Here, a lender convinces a homeowner to transfer the deed to them, claiming that it is necessary to acquire refinancing or prevent foreclosure. The homeowner then transfers the property and the refinancing is never acquired. This lender may then use the property as their own.
False Counseling Services. Another concern are groups or persons who advertise as “mortgage consultants” or “counseling agencies.” These organizations charge fees to homeowners for advice that could be obtained for free elsewhere.
How to Protect Yourself from Foreclosure Fraud
Before you become a victim of foreclosure fraud, it’s important to remember the following important points:
- Signing over a deed to a different person does not eliminate your financial responsibility for the loan you acquired in paying for the home. You are still liable for mortgage payments or outstanding debt.
- You do not need to sign over your deed in order to obtain new financing
- If a person approaches you offering to relieve you of debt, be cautious. These people are likely schemers and have acquired background information regarding your financial situation without your knowledge and seek to take advantage of your situation.
- Research and understand the basics of foreclosure and mortgage payments.
- Conduct business with persons you know and trust.
- Read the fine print before signing any documents. It is a good idea to have an attorney review the documents prior to signing as they will be able to raise any issues to your attention that you may have missed.
Do I Need An Attorney?
Foreclosure can be an emotional, as well as costly and complicated process. An experienced real estate attorney can help you consider your options regarding your situation and courses of action you can take to deal with your foreclosure issues. Experienced legal representation as well as valuable legal information is necessary to navigate the road ahead and minimize your emotional and financial stresses.
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Last Modified: 09-01-2015 10:05 AM PDT
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