Understating Your Foreclosure Rights
What is Foreclosure?
Foreclosure is a legal process where a creditor (for example: a lender or mortgage holder) can repossess or sell property for the purpose of repaying the debt owed on that property. Mortgage holders can foreclose on property anytime after the borrower starts missing payments 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, in general foreclosure involves the following steps:
- The mortgage holder gives the defaulting homeowner, a written notice of default.
- The homeowner is given a limited period of time where they have a chance to cure the default and pay all amounts due including interest, penalties, attorney charges and any other fees allowed by the law or the mortgage.
- The lender may pursue judicial foreclosure (involving filing a lawsuit in a court), or non-judicial foreclosure depending upon the laws of the state where the property is located.
- If the time allowed for the homeowner to cure the default has passed, the mortgage holder will probably give 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 will be filed to evict the property owner if he or she is still living on the property after the sale.
The length of time a foreclosure process takes can vary significantly. State laws and the mortgage holder’s motivation are major factors. In many cases, the foreclosure process will start three to six months after you missed your first payment.
Will a Foreclosure Action Wipe Out All of Your 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 HELOCs and second mortgage’s off in full if they are not paid out of the foreclosure proceeds.
In markets 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 protecting the mortgage holder (e.g., PMI) for 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.
A Lender’s Legal Obligations in a Foreclosure:
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 he or she is in default, and (2) 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 any 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 cure the default.
- Written claims (proof of money owed under the mortgage): Lenders also are usually required to file statements which 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 as it concerns 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? What Legal Ways Exist 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 begin 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 sales 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 are behind on, together with any interest, fees, or late charges incurred by the mortgage holder. Although this is the most difficult thing to do, since you are already in default because you haven’t made timely payments, this is the best way to prevent foreclosure proceedings.
- If possible try to work out a compromise 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, 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.
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 decline in housing prices, there are more and more situations where property owners will be responsible for taxable income resulting from a foreclosure.
Foreclosure, voluntary or involuntary, on a property can be very damaging to your credit. Your mortgage records will be marked as in foreclosure and these records will remain on your credit files for 7 years. A mortgage foreclosure is nearly as damaging as a bankruptcy filing and will have a significant impact on your ability to borrow in the future.
You can minimize the impact of a foreclosure by continuing to use your other credit and loan accounts responsibly.