When the economy is brutal, foreclosures become more common. So do homeowners’ questions about them.
It’s hard to make any blanket statements about dealing with the process, as it varies so much from state to state — and even from county to county. That said, foreclosures can occur when a home loan becomes just too much of a financial burden, and the owner simply cannot or will not make the payments any more.
Foreclosure is a term that dates back to the 1200s. It’s from the early French word forclos, meaning to exclude, shut out, or drive away. In today’s legal terminology, it means taking over a home that’s collateral for a mortgage. Given that a lender can evict a borrower, the meaning hasn’t changed all that much in 800 years!
Mortgage? Or Deed of Trust?
If a borrower stops paying, the mortgage lender will call the borrower, send a paper notification, and file the necessary paperwork to foreclose on the home. There are two main ways this happens. Some states use mortgages and must go through the court’s foreclosure process. Other states primarily use deeds of trust and can foreclose out of court.
When a lender has to use the court system to foreclose (as in Delaware, Kentucky, Ohio, Illinois, Pennsylvania, and New Mexico), it’s a more complex process and takes longer for the lender to carry out. In a deed of trust state (such as Maryland, Michigan, Virginia, West Virginia, or Tennessee), the lender simply sends a default letter to the borrower. This may involve recording a Notice of Default with the county recorder, but there is no need to get a court’s blessing. The “power of sale” clause lets the trustee for a deed of trust sell the property. In a deed of trust foreclosure, you do get a final opportunity to make good on the debt before the home is auctioned through a trustee’s sale. Otherwise, it’ll be sold to pay the debt. You’ll be refunded excess proceeds (if any) beyond what’s owed on the loan.
Missed Payments and Not Sure What to Do?
To slow down the process and have a chance of hanging onto the home, act. Speak to your mortgage company promptly. If your financial issues are likely temporary, explain. You might need to complete a hardship affidavit to get relief. A lender’s “loss mitigation” options can include:
- Reinstatement. If you can catch up with missed payments through a lump sum, the lender might reinstate the mortgage.
- Forbearance or payment plan. The mortgage company might agree to delayed payments in order to save the loan.
- Loan modification. If you have a regular income source, the mortgage company might change the terms of your loan to make the payment burden easier.
If you can find some way forward, most lenders will try to make arrangements. Usually they are able to avoid costs and losses if they can let borrowers stay in their homes and pay off the loan on adjusted terms.
If not, a short sale might be possible. If the mortgage company agrees to this, you sell your home for less than what you owe on the mortgage. While this helps pay some of the debt, the lender might have recourse to sue for a deficiency — the rest of what it’s owed.
Another option is the deed in lieu of foreclosure. This means the lender will take the house deed instead of foreclosing. A deficiency judgment is possible in this case, too.
But lenders can’t pursue deficiency judgments in every state. These states, where borrowers have more protection from creditors, are called non-recourse states.
Pro tip: Cash for keys, which is financial support for a move, may be available from the lender to a borrower who agrees to leave a foreclosed home in decent condition. This benefit may be available in deed in lieu or short sale agreements, depending on the lender’s policies.
Is a “Produce the Note” Demand Still Effective?
You might have heard of homeowners who staved off foreclosures by demanding that the mortgage company produce the note. In this situation the foreclosing lender is asked to prove its right to foreclose by showing it holds the original promissory note.
The promissory note, which you signed at closing, represents your agreement to pay back the home loan. When the loan is sold from company to company through the secondary mortgage market, the promissory note is endorsed over to its next owner. A borrower in this case might buy time by asking the current company to produce the note. In deed of trust states, people might do so as a way to force the mortgage company to go to court.
Note that this strategy is rarely useful any more. Today’s mortgages are carefully handled, and lenders keep their documents in good order. In any case, a mere photocopy of the note or a lost note affidavit will be good in court for the lender.
When Foreclosure Can’t Be Avoided
Are you upside down on the mortgage? (Do you owe more than the home’s value?) If not, and you have at least some equity, consider selling the home. With the current demand for housing, this might be an effective strategy and you might even pocket a profit.
Getting an agent often pays off. There are real estate agents out there who know how to move fast in these situations and how to offer potential buyers attractive arrangements — even rent-to-own.
You do have a window of time to carry out a sale. Check your state law to get an idea of the timeline. Once foreclosure has started, though, your lender’s position will be a factor in how the sale plays out.
If you have an FHA assumable loan, it might be worthwhile looking for a buyer who is willing to take on the loan. If your loan’s rate is less than the current prevailing interest rate, what you have to offer could be highly attractive to buyers.
In some of the most difficult cases, buyers find themselves in areas with declining real estate markets. Their loans can be bigger than what their properties will fetch on the market.
Markets tend to climb back up, given time. But what if the borrower is struggling and has no time to wait?
Walk Away? Making Tough Calls for a Property Under Water
Some borrowers simply stop paying and walk away from their homes. In other words, they deliberately bring on a foreclosure.
This is always an option, but be sure to know what happens to your financial profile if you go this route. Do a search for strategic default.
It might well be worth taking in a renter rather than going through foreclosure on purpose. Foreclosures on a credit profile can be seen in credit checks for seven years (including by potential employers and landlords), and can make your next mortgage much more difficult to get — and much costlier when you do.
Plus, don’t forget that some states allow mortgage companies to go after borrowers for deficiency judgments. In that situation, if the lender forecloses and doesn’t get all the money it’s owed, it can sue borrowers for the rest.
State laws are complex. Yet there can be sound legal responses to foreclosure. Consider meeting with a local attorney or legal aid group in your area to find out what options are available to you. Be wary, meanwhile, of any business that claims it can help get you a better mortgage relief deal than your mortgage company can. At the end of the day, it’s your mortgage company that has to come to an agreement with you. And it has to operate within the boundaries of state laws and its own policies and guidelines.
Finally, if you need credit repair guidance, seek it. It’s OK to ask for directions. And know that you’re not alone in this tough, Covid-battered economy.
Brandon Cornett for the Home Buying Institute: What Happens During the Foreclosure Process? (Feb. 28, 2009).
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