Mortgage Foreclosure FAQs: Understanding Your Foreclosure Rights
The Coronavirus Aid, Relief, and Economic Security (CARES) Act offers mortgage relief for homeowners with federally backed mortgages. The act offers a foreclosure moratorium and the right to forbearance if you are experiencing financial hardship due to the COVID-19 coronavirus pandemic. If you do not have a federally backed mortgage, contact your mortgage servicer to discuss your relief options.
If you’ve fallen behind on your mortgage payments, the threat of foreclosure can become overwhelming. Struggling homeowners might feel inclined to simply accept their fate—there’s no getting out of foreclosure, right? But when it comes to mortgage foreclosure, remember that you have options.
Understanding those options and what you can do if your house is in foreclosure can help you mitigate the damage done to your credit and overall financial health. It might even help you take action to keep your home. We’ve gathered some general information regarding foreclosures to help you get an idea of how it works. State laws vary significantly, so work with a legal professional to determine the laws governing your foreclosure proceedings.
Foreclosure means that your mortgage lender can legally repossess your house due to nonpayment. They can then sell your house to help repay the debt you owe on it. This is true whether you are behind on your first or second mortgage. Your mortgage agreement will define when your lender can begin the foreclosure process. This is typically determined by the length of time you are behind on your payments.
Keep in mind that every state has different rules and regulations for foreclosure procedures, and many states offer exceptions to this that may work in your favor. If you think you may be in danger of foreclosure, work with a legal professional to determine your state’s guidelines. For example, in some states you have to miss a certain number of payments before foreclosure processes can begin. Some states may also allow you to reinstate the loan up until a specific deadline.
What Happens When a House Goes into Foreclosure
The foreclosure timeline can vary significantly. State and Federal laws, your mortgage agreement and the mortgage holder’s motivation are major factors. In many cases, the foreclosure process starts three to six months after you miss your first payment, assuming you don’t make or catch up on payments.
State laws vary, so be sure to work with a legal adviser or your lender to determine what will happen in your specific situation. In general, mortgage foreclosure involves the following steps.
The mortgage holder gives the defaulting homeowner a written notice of default. This is a formal notice that you have fallen behind on your payments and are in default.
The homeowner is given a limited period of time to cure the default and pay all amounts due. That can include interest, penalties, attorney charges and any other fees allowed by your state’s laws and your mortgage contract.
Once the time allowed for the homeowner to cure the default has passed, the mortgage holder will give notice of a foreclosure sale. This is the actual day of foreclosure.
Many states have a redemption period after the foreclosure sale, allowing you to reclaim your home.
Foreclosure and Your House-Related Debt
Foreclosure actions can wipe out some of the property owner’s debt, such as the original mortgage, home equity loans and second mortgages. If the proceeds of the foreclosure don’t cover all the costs of your second mortgage or other home equity loans, you are still obligated to pay those.
In some cases, you might also be responsible for some of the mortgage payment, even after losing your home. If the property sells for less than the balance owed on the original loan, a lender could file a deficiency judgement against you in court, which requires that you repay the difference. This also gives the mortgage holder the right to collect the remainder of the debt owed from any other assets you might have. Not all states allow deficiency judgments in all circumstances. Work with a lawyer or legal adviser to determine your rights and plan of action.
Lenders’ Obligations in a Mortgage Foreclosure
Lenders have different obligations in different states. However, when it comes to mortgage foreclosures, they all typically follow at least three common requirements.
Notice of default. In most states, lenders are required to provide a homeowner with sufficient notice of default. The lender must also provide notice of the property owner’s right to cure the default before the lender can initiate a foreclosure proceeding.
Written proof of money owed under the mortgage. Lenders are usually required to file statements that itemize the amount the property owner owes under the mortgage. The amount owed includes the principal, interest, late charges, attorney fees and any other charges the lender is permitted to charge under the terms of the mortgage or the laws of the state.
Servicemember 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 Servicemembers Civil Relief Act is intended in part to protect deployed active duty service people. If you are a member of the armed services, consult an attorney about your rights as they concern foreclosure proceedings.
Ways to Stop or Prevent a Foreclosure
The best way to stop a foreclosure is to take action to prevent the lender from beginning the process. When possible, try these proactive ways to save your home from a foreclosure.
Catch up on your default. In many cases, the first notice of default provides you with options for catching up on what you owe. If you can make up your payments and stay current, the lender is much less likely to foreclose.
Ask for a loan modification. Many lenders will work with you if you need help making your loan payments. Modifications can help you catch up on late payments or potentially reduce the amount you pay temporarily if you’re experiencing financial hardship.
Request a short sale. If you can’t afford your home anymore, you can request a short sale. The lender has to agree to a short sale, but if they do, you can sell the house to a third party for less than you currently owe. In some states, the difference is forgiven, while in others you may be required to pay the difference between the sale price and the remaining loan amount. A short sale will affect your credit, but the effect will be less than that of a foreclosure or bankruptcy.
File for bankruptcy. Filing a bankruptcy petition that includes your mortgage puts an automatic stay in place. This means that lenders can’t continue any type of collection procedure until the bankruptcy has been resolved or dismissed. Whether or not you keep your home depends on what type of bankruptcy you file and whether you can work out mortgage payments in the future. Filing for bankruptcy can have severe consequences for your credit and finances. Consult with an attorney before moving forward with this option.
Defenses Against Foreclosure
If the lender has already filed for a foreclosure and none of the options above will work for you, you might be able to legally fight the filing with a technical or substantive defense. Only you and your attorney can determine how to proceed through the process.
Technical defenses are defenses to the foreclosure proceeding itself. One example of a technical defense is when a property owner is not given adequate notice of the default and proceedings. However, technical defenses are often not very helpful in preventing foreclosures because a mortgage holder can easily correct 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 use the terms of the mortgage itself to halt a foreclosure. Here are some examples of substantive defenses to the foreclosure process:
You really aren’t 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.
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 takes place or before the court ratifies the sale if the sale was improperly conducted. Work with your attorney to determine whether this is the right move for you.
Tax Issues Related to Mortgage 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 may owe taxes on the difference between the value of the home and what is owed on the mortgage and forgiven in the foreclosure action. You will want to work with your tax professional to help determine your tax responsibility in this situation.
Consider this example to understand how it might work:
You owe $120,00 on the home. The bank sells your home for $100,000
The bank accepts the $100,000 it got in the sale and forgives the rest of the debt via foreclosure, which means it doesn’t seek to collect that money from you.
The IRS considers that $20,000 as a form of income because it’s money you should have had to pay but didn’t. You might owe taxes on that $20,000.
How Mortgage Foreclosure Impacts Your Credit
Short sales and other foreclosure proceedings can drop your credit score by a substantial amount. Likely, even if you stop the foreclosure and get back on track, your credit has taken a hit because the late payments would have been reported. Foreclosure will appear on your credit report for seven years. And in many cases, you will be required to wait two to eight years before you can purchase another home.
No matter what happens with a foreclosure, it’s a good idea to find out where your credit stands and how you can work to improve it. That way, you position yourself to be able to find a new home in the future—whether you buy or rent. Sign up for the Credit Report Card today to get a free look at your credit history and better understand how you’re doing with the five factors that impact your score.
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I want to help. Bill Byrd, REO Specialist: 415.559.5660