Guide to Foreclosure

We hear about foreclosures every day. In the news, on the Internet, in magazines and in everyday conversation. Unfortunately, as a result of the recession, the sub-prime mortgage mess and the housing market decline, there have been record numbers of foreclosures across the country the last couple years.  Millions of people have either lost their homes to foreclosure or are in default.

So just what is a foreclosure?  A foreclosure is the process by which a lender takes back the borrower’s property when the borrower defaults on their mortgage.  Foreclosure proceedings can be judicial or non-judicial trustee sales depending on the laws of the state where the property is located.  The government together with non-profit groups and the mortgage industry have been working together to find solutions so that homeowners just like you and me don’t have to lose our homes and most valuable asset to foreclosure.

What to Expect in Foreclosure?

A foreclosure process can take approximately 5 months or longer whether it is a judicial foreclosure or non-judicial foreclosure private trustee sale.  Each state has different laws and timelines. It also depends on the lender and how many other foreclosures they are in process of working on at the same time.  The lender institutes either a judicial or non-judicial foreclosure process against the borrower depending on what state the property is located in. The foreclosure timeline is pretty much the same for either type of foreclosure.   Realistically today, foreclosures are taking as long as a year before the property goes to foreclosure auction.  Here is a general foreclosure timeline to give you an idea what to expect and how the process works:

  • Borrower is at least three months in default on their mortgage payment.
  • Lender starts initial foreclosure proceedings by recording notice of default or filing a Lis Pendens (litigation pending) depending on statutory laws of the state where the property is located.
  • Borrower has statutory time in which to respond and defend themselves from foreclosure (varies from state to state) prior to the foreclosure sale.
  • Notice of Sale is published in the newspaper of general circulation in the county where the property is located (approximately 3-4 months after the initial proceedings are started by the lender.) Again it varies from state to state.
  • Redemption Period.  Borrower has statutory redemption period in which to redeem the property, pay all costs and fees and arrearages to bring the mortgage current. Each state has different laws regarding redemption periods.
  • Foreclosure auction or Sheriff’s Sale is held at the court house steps (judicial foreclosure) or other designated place approximately 5 months or more after initial foreclosure proceedings are instituted by lender.
  • If the property is not sold at the foreclosure auction or Sheriff’s Sale, then it becomes an REO (bank owned real estate) property which is now owed by the bank.  The bank lists the property for sale with a Realtor and it is offered in the MLS system to the public for sale.  This normally occurs approximately 6 months to year after foreclosure proceedings were started.

Homeowner Options

Homeowners do have options to save their home from foreclosure.  Doing nothing is the worst possible thing you can do.  Don’t panic. The smartest way to save your home from foreclosure is to start finding a solution early on.  Your first steps should be to communicate with your lender if you think you are going to be in default or are already in default on your mortgage.   It is also highly recommended that you consult with a foreclosure defense attorney to find out what your best options are to save your home or a housing counselor.  Here is a list of the typical options that are available to homeowners facing foreclosure:

  • Refinancing and Negotiating
  • Reverse Mortgage
  • Bankruptcy
  • Going to Court
  • Giving Up Your House

Refinancing and Negotiating

If you have equity in your home, then you may qualify to refinance your mortgage. For those of you who are upside down on your mortgage, then you may want to pursue a mortgage modification.

When you refinance, the old loan is paid off with the new loan, which is usually at a lower interest rate.  When you obtain a mortgage modification, the existing loan is modified by either reducing the interest rate, adding the arrearages to the back end of the loan or sometimes the lender will forgive some of the debt and/or extend the loan term from 30 years to 40 years.  Refinancing or mortgage modifications only work best when you have a variable interest rate loan and you lower your interest rate by at least 2%.  Otherwise it won’t lower your monthly mortgage payment enough to make a difference.
Another option when negotiating with your lender is to ask for a reinstatement of your loan. This means that you must pay all the arrearages and any fees to bring the loan current.

A repayment plan is also an option. This is an agreement between the lender and the borrower where the borrower pays a higher payment to get caught up on the payments to bring them up to date. With a forbearance agreement, the lender allows the borrower to make lower payments or no payments for a period of time and then the later payments are higher to catch up.  On FHA loans, FHA allows their eligible borrowers to postpone monthly mortgage payments for a minimum of four months.

Reverse Mortgage

A reverse mortgage is a special type of home loan for qualified seniors that allows the borrower to convert a portion of their equity in their home into cash. In order to qualify for a reverse mortgage, you must be 62 years of age or older. No repayment is required until the last borrower dies, sells the home or moves away. Other rules that apply are that the borrower must reside in the home, and it must be their primary residence. The amount of interest continues to grow each month on reverse mortgages. The borrower is responsible for paying the taxes, insurance and maintaining the home in good condition.

Government vs. Private Reverse Mortgages

The safest type of reverse mortgages are the government reverse mortgages because they cost less and you can never be foreclosed upon as opposed to private reverse mortgages. The Home Equity Conversion Mortgage (HECM) is a safe plan sponsored by FHA for seniors and is most popular.  Seniors use the reverse mortgage money to help supplement their social security income, for unexpected medical bills, or to make home improvements and repair.   With an FHA HECM reverse mortgage, borrowers can never owe more than the value of their home and cannot be foreclosed upon. The loan is repaid with interest at the time the home is sold by the borrower or their heirs. There is a monthly service fee that can range from approximately $30.00 -$35.00 for managing the account.

Eligibility Requirements

  • 62 or older
  • Borrower’s primary residence and borrower must reside there.
  • Single family homes, 1-4 unit homes with one unit occupied by the borrower or HUD approved condominiums and manufactured homes qualify.
  • Prior to obtaining the loan, the borrower must receive counseling from a HECM counselor.

Private Reverse Mortgages

Private reverse mortgages cost more than government ones. You pay more fees such as application fees, appraisal fees, origination fees, closing costs and insurance. The eligibility requirements are similar to the government programs.  Here are a few things to watch out for:

  • Avoid loans that charge any upfront fees and costs.
  • Always work with a reputable lender or mortgage broker.
  • Beware of crooks and scams that prey on seniors.
  • Refinancing or other options may be better choices.
  • Avoid high interest rates or high monthly service fees.

Reverse mortgages can come in handy when you have a financial emergency. However, before you make a decision to obtain a reverse mortgage, make sure you understand the loan terms, and always shop around and compare other loan products as well. Being well informed and educated about your mortgage options is the safest way to protect your most valuable asset.

Bankruptcy

When all options have been exhausted or failed, then filing bankruptcy to avoid foreclosure may help. Bankruptcy is used as a last resort in order to stop a foreclosure proceeding.  When you file either a Chapter 13 or Chapter 7 bankruptcy, the court automatically issues an order for relief, which automatically stays or stops any creditors from collection activities against you.  For instance, if your home is scheduled to be sold at a foreclosure auction, the sale will be postponed during the bankruptcy proceedings.

There are different Chapters in Bankruptcy that you can file under such as Chapter 7 or Chapter 13 so it is important to understand the bankruptcy laws.  Chapter 7 wipes out all your debts. In a Chapter 13, you can keep your home, and you agree to pay your creditors via a payment plan.   Both bankruptcy and foreclosure ruin your credit score. However, bankruptcy may make it easier for you to rebuild your credit score than a foreclosure because it may wipe out all or most of your debt.  Since bankruptcy is complicated, you should consult with your bankruptcy or foreclosure defense attorney.

Going to Court

If your lender has instituted foreclosure proceedings, and you do not show up at the hearing, your lender will be awarded a default judgment, and the foreclosure process will begin ending with the sale of your property at an auction. If you believe you have a legal defense to stop the foreclosure such as your lender has committed predatory loan practices against you, or committed lender fraud or misrepresentation or other legal defenses, then you will need to go to court to legally defend yourself.  It is always recommended that you hire an attorney to help defend yourself in a foreclosure action as these matters are quite complicated.

Giving Up Your House

The decision to give up your house is not an easy one, and you should exhaust all legal remedies first. If after consulting with a foreclosure defense attorney, your attorney advises you that given your financial circumstances, the best option is to give up your house, then a deed in lieu of foreclosure might be the easiest. A deed in lieu of foreclosure allows you to simply sign the deed back to the lender and return the house, walking away owing nothing.  This is less stressful than going through a formal foreclosure proceeding. However, you will need to contact your lender to see if that is an option. Since the average foreclosure costs a lender more than $50,000, it is smarter for the lender to accept the deed in lieu.  Also, a foreclosure damages your credit more.

Foreclosure Scams

Types of scams to watch out for

Mortgage foreclosure rescue scams are the biggest scams right now. Watch out for anyone that says they can save your home from foreclosure and asks for a large upfront fee. The only person that is allowed to ask for a retainer upfront is a licensed attorney. There are many legitimate mortgage modifications and loan brokers that can help you with a mortgage modification or refinance or other options to save your home from foreclosure, but you need to be aware that there are a large number of crooks and scam artists that will take your money.  In return, these scam artists do nothing for you except put your in a worse financial position and jeopardize your chances of successfully negotiating with your lender and saving your home from foreclosure. They may ask you to make your mortgage payments to them or even sign over a deed to your property. Watch out for persons that call themselves mortgage consultants or foreclosure services.

If you suspect that someone is trying to scam you, check their references carefully with the better business bureau and the State Attorney General’s Office before giving any money to them.  Ask for references and credentials that you can verify. There are several non-profit certified HUD counselors in every state that can help you, and they do not charge any fees.  Be on your guard. Facing foreclosure is stressful and makes you more vulnerable to being a victim.

Taxes and Foreclosure

The Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence as a result of a foreclosure or mortgage modification up to $2 million ($1 million if you are married filing separately). For more information about the Mortgage Forgiveness Debt Relief Act of 2007, please visit the IRS website at http://www.irs.gov/individuals/article/0,,id=179414,00.html.

Judicial Vs. Non-judicial Foreclosure

Foreclosure laws vary from state to state.  In some states foreclosures are conducted by judicial sale, while other states conduct foreclosures by non-judicial sale or trustee sale.   There are states that also allow both procedures depending on what language is contained in the mortgage or deed of trust.  The following will give you an overview of each procedure:

Foreclosure by Judicial Sale

Judicial foreclosure proceedings are instituted by the lender filing a lawsuit (lis pendens) against the borrower.  Copies of the paperwork must be sent to the borrower and any junior lien holders. The lender must prove that the borrower is in default. The borrower is given an opportunity to respond to the action within the prescribed statutory period.

If the court finds that there are sufficient grounds or cause for a foreclosure action, the court will issue an order setting forth the terms and the conditions of the sale. A notice of sale will be published in a newspaper of general circulation in the county where the property is located and posted at the courthouse and at the property advising of the public of the date, time and place of sale and the contact person.  Judicial foreclosures are conducted at the courthouse steps by either the sheriff or an auctioneer.

The court must approve all the terms of the sale once the sale has been conducted.  Some states allow a statutory redemption period in which the foreclosed owner may cure the default by paying the amount owed to the lender as well as any other fees incurred and in arrearage and acquire back their ownership interests in the property.  If the foreclosed owner does not redeem their property, then the new buyer/investor is issued a certificate of title.  Judicial foreclosure processes can take anywhere from six months to one year.  Especially right now since the courts are backed up with so many foreclosure actions it could take as long as a year.

Judicial foreclosures are sometimes better choices for lenders because may also be able to obtain a deficiency judgment against the foreclosed owner to recover the deficiency amount from the sale and what was owed on the loan balance plus fees and costs.

Non-Judicial Foreclosure or Trustee Sales

The process starts once the property goes into default and the lender records a notice of trustee sale with the County Recorder’s office. A copy of the notice must be sent to all interested parties on the deed. A copy of the notice is then placed on the property and usually at the courthouse or a public place where the auction will take place. By law, the notice must be published in a newspaper of general circulation in the county where the property is located usually for four consecutive weeks. To identify the property, all properties are issued a trustee sale number in order to make it easier to find information and track the property.  The notice of sale contains the date, time and place of the sale, any postponed dates and the contact person. Some states allow the foreclosed owner an opportunity to redeem the property prior to the sale and sometimes even a period of time after the sale.  The laws vary from state to state. Most auctions are held on the courthouse steps and conducted either by the trustee or the sheriff. 

Properties that have IRS tax liens or other claims require additional procedures that the lenders must take. Bankruptcy properties are under the jurisdiction of the bankruptcy court and cannot be sold at auction until the court issues an order. Since there are no real estate commissions paid to Realtors at trustee foreclosure auctions, you will not find any real estate agents involved in the transaction.

Next Page: Keeping Your House

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