YOU HAVE OPTIONS: YOUR GUIDE TO AVOIDING FORECLOSURE
Table Of Contents
Taking Back Control
What Is Foreclosure?
Reasons People Go Into Foreclosure
What Are Your Foreclosure Options?
What Happens At A Foreclosure Auction?
Deed Of Trust And Trustee Sales
How To Avoid Foreclosure (Other Than Selling) 35
How To Avoid Foreclosure By Selling Your Home
Short Sales (And When They’re Necessary)
10. Understanding The Home-Selling Process
11. Upgrading With ROI In Mind
12. The Selling Process For A Home In Foreclosure 87
13. Where Will You Go?
14. Tips For Boosting Your Credit Score
15. Financial Tips For The Future
16. A Guide To Searching For The Right Home 117
17. A 12-Step Guide To Buying A Home
18. Home Loan Shopping 101
Options to Save or Sell y e or Sell your home our home before it is t e it is to late. We will give you several options so you can pick which one is best for you. Options for most situations are: 1. Sell you home as fast as possible working with us and your bank to save as much equity and credit as you can before it is taken at auction. 2. We have investors that will pay your back payments and add a 2nd mortgage to the property, so you can stay in the home and make smaller payments over time to pay them back. 3. Investors will pay you cash for your home for a quick sale so you get the most money out of it before the end of the foreclosure process. 4. We will work with your bank to do a short sale listing on your home to stop the fee's. 5. Owner/Investor partnership were investor will bring you current on your back payments, fix-up the home, so you can get the most value when we sell after paying back the investors at the closing table. This will stop the fee's and negative reporting to your credit. Please call our office for a Free no Obligation call or presentation to explain each program in more detail.
Best Regards, Alexa Elliot 303-990-5111
CHAPTER 1 Taking Back Control
If owning your own home is a big part of the so-called American Dream, then losing your house through foreclosure can feel like a nightmare. Bad things happen to good people every day, but it doesn’t define who you are. Logic tells us that a house is just four walls; it’s you and those whom you love who turn any house into a home. But in the middle of a foreclosure situation, it can feel like the world — or, at least a big part of it — is ending. When you’re facing foreclosure, it’s easy to feel like you don’t have any control over the situation. What you’re feeling is natural. Hundreds of thousands of Americans have gone through very similar situations and experienced similar feelings. However things look like to you now, I’ll make you a promise: You’ll get back on your feet. And this book was written to help you do just that. If the Great Recession taught us anything, it’s to be prepared for the unexpected impact world dynamics can have on our personal lives. Yet a Freddie Mac/Roper poll discovered that more than 60% of homeowners who are delinquent in their mortgage payments are unaware of services that some mortgage lenders offer that would help them. Most of these alternatives are poorly publicized, but in this book, we’ll explore some of them together. This book is your resource. You need, and deserve, a resource that provides you with a good starting point in managing the process of foreclosure. This book is designed to give you a head start in that process. When you make the decision to sell your home — or take other proactive measures to save yourself from foreclosure — you take back control of your life and become a part of the 1
decision. Don’t let other people make your decision for you.
Before we get started, I make this pledge to you: I’ll help you the way a good friend would, and I’ll do it without judgment, without bias, and without asking anything in return. When it’s useful, I’ll direct you toward other resources. The guidelines I present in this book will help to prepare you personally and financially to cope with foreclosure and to develop your strategy for turning the foreclosure process into opportunities!
YOU'RE NOT ALONE
Foreclosure is far more common than you might think. A study conducted by the Federal Deposit Insurance Corporation (FDIC) found that one in every 200 homes will be foreclosed. Let’s put that number in perspective; in a city the size of Washington, D.C., that means 3,000 residents will lose their properties every year. According to the Mortgage Bankers Association, in the U.S., one child in every classroom is at risk of losing their family home because their parents can’t pay the mortgage. Every three months, 250,000 new families enter into the foreclosure process. Remember the Great Recession and the years that followed? From January 2006 to April 2016, more than 6.3 million foreclosures were completed. Foreclosures hurt all of us. In a 2005 Chicago case study, researchers William C. Apgar, Mark Duda, and Rochelle Nawrocki Gorey found that a single foreclosure can cost local governments up to $34,000 for inspections, court actions, police and fire department efforts, potential demolition, unpaid water and sewage, and trash removal. Additionally, the foreclosure can have a negative impact of $220,000 on the equity and property values of nearby homes. Communities and regulators have begun to realize that getting you the help you deserve is in everyone’s best interest.
Foreclosure can happen to anyone if the circumstances for it are present. It’s a misconception — and it’s incredibly unfair — to judge anyone’s success based on their foreclosure experience. Often, the more success you have, the more likely you are to buy an expensive house, to invest in a wide range of assets, or to participate in blockbuster deals with other participants. For those reasons, these “successful” people are often vulnerable to a downturn in the economy or housing market; a personal financial setback; and/or a complication arising from the actions of a partner, spouse, or co-investor. What do music entertainers Paul McCartney, Rihanna, Billy Joel, and R. Kelly have in common with actors Kim Basinger, Nicholas Cage, and Kristen Bell and athletes such as Evander Holyfield, Terrell Owens, and Allen Iverson? You guessed it; these are only a few of the famous personalities who have faced foreclosure at some point during their careers. Some managed to save their houses because of a turnaround in their luck or the last-minute intercession of a friend. Some lost the houses they loved. Others found ways to avoid foreclosure by pursuing sensible alternatives, the same alternatives that might just be available to you. But one thing is clear: Foreclosure didn’t define them, and it doesn’t define you, either! We’ve seen how an entire industry has grown up around the practice of lending to home buyers. Fortunately, an entire industry also has been growing to meet the needs of individuals who require help and protection in the foreclosure process — individuals like you. This book is your roadmap, your way out of the foreclosure maze! We’ll begin in Part 1: The Ins and Outs of Foreclosure, by examining what a foreclosure is … and what it’s not. The truth might surprise you in ways that you find encouraging. We’ll talk
about why homes go into foreclosure and we’ll look at some of the nuts and bolts of the process, such as deeds of trust, trustee sales, and what happens at a foreclosure auction. We’ll also begin to outline some of your options. In Part 2: How to Avoid Foreclosure, we’ll explore your options in greater depth, with an eye to helping you develop your foreclosure strategy. Some of these options could possibly help you avoid having to sell your home. Others will focus on selling your home yourself, giving you greater control over the outcome, including the terms and potential profit you could make off of the sale. Part 3 takes a deeper dive into The Selling Process to Avoid Foreclosure. You’ll quickly develop a better understanding of the home-selling process and how that process differs when you’re facing possible foreclosure. You’ll learn about: • short sales (when they’re necessary); • ways to improve your chances of selling; • common seller mistakes to avoid; • how to upgrade your home in ways that will maximize your return on investment (ROI); and • how to negotiate so that you have the advantage. Part 4 is all about Moving Forward and the road to foreclosure recovery. This includes resources you can use to find and relocate to a new home, if necessary. The goal is to emerge from the foreclosure process financially stronger so that you never again find yourself in the same disadvantaged position. You’ll learn tips for improving your future finances, including effective ways to boost your credit score. Part 5 will focus on Finding Your Next Home when you’re ready. Together, we’ll explore how to search for the right home while
avoiding common mistakes buyers make. You’ll want to use my 12-Step Guide to Buying a Home and learn the basics of shopping for a loan. I also provide a handy “do’s and don’ts” section on negotiating from a home buyer’s perspective. As you read this book, always keep in mind that legal advice varies according to where you live as well as your individual circumstances. Consult a competent real estate attorney for all your legal needs. Above all, remember that even if your house undergoes foreclosure, you and your loved ones will go on. Within you, you still possess all the tools you need to build a wonderful future filled with happiness, contentment, and success. How you meet the foreclosure challenge will enable you to get past this difficult period — to thrive , not just survive. So, let’s get started!
CHAPTER 2 What is Foreclosur eclosure?
So, what exactly is foreclosure, and how do good people find themselves stuck in the foreclosure process? As part of the loan agreement, you agree that the house you’re buying will serve as collateral for the loan. This means that if you stop making payments, the lender can take possession of the home and sell it in order to recover the money they loaned you. If you’re a few days late on a mortgage payment, there is no reason to panic. The bank is not going to take away your house for this. Most mortgage contracts will give you a 15-day grace period and will add a 5% late fee on payments made after that grace period. Chances are, you only get into trouble if you’re more than 90 days late. Note: Please check with your bank or mortgage lender to find the exact terms and conditions. At this point, the bank will issue a “Notice of Default” with the County Recorder’s Office. A letter will be mailed to you, notifying you that you’ve defaulted on your loan. You’ll be given 90 days to pay off the debt. Your house is now at what is called the pre-foreclosure stage. This means that the bank hasn’t taken possession of your house yet. If you fail to pay off your loan after the notice, your property officially enters foreclosure and your bank will take possession of the property. They then sell it to recoup their money. This process can take a while. For example, in New Jersey, the average time it took for a foreclosure to complete in 2017 was 1,347 days — the longest in the nation. According to RealtyTrac’s U.S. Foreclosure Market Report, the average nationwide foreclosure took 883 days. 7
While the paperwork is winding its way through, you don’t have to move out, but when the process is complete, you’ll receive a notice to vacate. (In most states, you have between five and 30 days to leave.) You’ll also receive a “Notice of Sale,” which states that the property will be sold at auction, and it lists the date, time, and location of the auction. The lender publishes the Notice of Sale in a newspaper in the county where the home is located for three consecutive weeks prior to the auction date.
Some states allow lenders to foreclose and repossess your property without the necessity of obtaining a court order. The California Department of Real Estate’s Homeowner’s Guide: The Foreclosure in California defines this judicial foreclosure as, “a privately conducted but publicly held sale.” The trustee is not obligated to obtain a court order before foreclosing and repossessing your home. This streamlines the process in a way that favors the lender. Your only recourse to stall the foreclosure auction might be to file suit against the lender, giving you an opportunity to “make your case” for a postponement. Most states’ laws (31 states, plus Washington, D.C.) permit nonjudicial foreclosure: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Washington, D.C., Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico (sometimes), North Carolina, Oklahoma (unless the homeowner requests judicial foreclosure), Oregon, Rhode Island, South Dakota, (unless the homeowner requests judicial foreclosure), Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming.
Judicial foreclosure occurs under supervision of the court. It is a more borrower/homeowner-friendly process that requires legal filings, court-imposed notices, timelines, and hearings. In a judicial foreclosure jurisdiction, the mortgagor goes to court to initiate foreclosure proceedings. It can take several months or even longer for a judicial foreclosure. Another advantage to the homeowner is that any legal defenses to the foreclosure may be raised (without the owner having to file a lawsuit). Judicial foreclosure proceedings are required in Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New Jersey, New Mexico (sometimes), New York, North Dakota, Ohio, Oklahoma (if the homeowner requests), Pennsylvania, South Carolina, South Dakota (if the homeowner requests), Vermont, and Wisconsin. In most cases, the borrower must be more than 120 days delinquent in payments before the lender can start a foreclosure. The lender sends a letter, notifying the borrower of their intent to begin foreclosure proceedings and specifying a period within which the borrower must respond (usually between 20 and 30 days). Regardless of which kind of foreclosure process your state mandates, unless you respond, the chances are excellent that the foreclosure will go through. The court will issue a default judgment that authorizes the lender to sell the home. If the borrower responds, a hearing is scheduled in which the borrower can tell a judge why foreclosure shouldn’t be permitted. The better the defense, the longer the process will drag out. If the court decides in the lender’s favor, it will enter a judgment ordering the sale of the home to satisfy the debt. If the property is not sold at the foreclosure sale, ownership goes to the lender. Even when the borrower loses ownership of the
home, most state laws don’t require moving out immediately. Typically, the tenant can remain in the home, payment-free, until receiving an official, written eviction notice. It’s often more practical to move out prior to eviction.
In the Introduction to this book, we touched on the fact that facing the prospect of foreclosure can affect our mood and thinking process. Foreclosure can seem overwhelming, and when we’re overwhelmed, it’s hard to think productively. You might have read or heard about the five stages of grief: denial, anger, bargaining, depression, and acceptance. This model was created to demonstrate the emotional states that terminally ill patients experience after a diagnosis. Since then, it’s been loosely applied to everything from a bad breakup to the death of a loved one. It’s natural for individuals and families faced with the prospect of foreclosure to experience their own range of emotions. Many homeowners experience self-doubt. “If only I had done things differently,” they tell themselves. But reasons for foreclosure are almost always more complicated than the actions of one individual. Consider job loss, for example. Were you or your partner laid off from a job? Your employer ultimately made that decision, and the reasons were probably more complex than they seem. Did the economy — or management’s own poor decision making — make layoffs necessary? Did the company where you worked experience a sudden loss of business because of fewer customers, seasonal buying habits, rising material costs, or other conditions beyond your control? Perhaps your former employer had to cut costs or eliminate an entire product line. Maybe new owners or managers simply wanted to start with a “clean slate” and hire their own people. Regardless of the reason or reasons for the layoff, your employer made a final call that you (or your partner)
did not choose.
Did you or a loved one experience a serious health crisis? In most cases, that’s not something you could have foreseen or controlled. Health insurance remains a hot political topic that we won’t tackle here. Regardless of the reasons, the inadequacy of health insurance coverage is a reality for many Americans. Was foreclosure the result of a divorce or breakup? A troubled relationship is rarely the fault of only one partner. It takes work by two willing and committed individuals to make a relationship succeed. Imagine how much harder it can be to work through the foreclosure process when you and your partner aren’t on the same page. Further, as we learned during the Great Recession, the need for many foreclosures could have been averted if lenders had applied realistic guidelines for qualifying home buyers in the first place — and if government had exercised responsible oversight over the lending process. There’s plenty of blame to go around, but you’re not to blame for wanting to give yourself and your family an opportunity to experience homeownership. Researcher Robert D. Dietz determined that homeowners tend to be happier and healthier, both physically and emotionally. They participate more in political and community activities, including voting. Their children tend to perform better academically and experience fewer behavioral problems. Who wouldn’t want these things? Whatever the underlying cause of your foreclosure, it feels terrible to you, and it’s natural to experience a range of difficult emotions. Mastering these emotions is a crucial first step in dealing with the problem. Remaining stuck in denial or unhappiness about the situation can prevent you from taking action at a time when prompt action is exactly what you need to
explore and implement your alternatives.
It’s common and natural to feel that you’re losing control. After all, a bank or other lending institution — some faceless corporation — seems to be calling all the shots. They’re dictating what you can and cannot do, trying to force you to leave the dwelling where you want to stay, and they’re setting the timeline. The lender has many experts at their disposal: Lawyers to clarify their legal options and draft contracts. Lobbyists to influence legislation. Economists to figure out where the local and national real estate and investment markets are headed. Marketing experts to figure out how to influence your real estate buying habits. Accountants to tabulate everything. On the surface, these experts might seem to be aligned against you at foreclosure time, and that gives the impression that they hold all the cards. The truth is, there are laws to protect your interests, even in foreclosure. You have resources and options available to you, even if they’re not readily communicated to you. Facing your options in a foreclosure can feel like confrontation. We’ve been raised to believe that banks and other lending institutions are powerful, faceless adversaries. In that sense, they are unknowable, and it’s easy to fear the unknown. Many homeowners put off contacting their lender because they’re embarrassed to do so. The Freddie Mac/Roper poll also found that homeowners avoid contacting the lender because they don’t believe the lender can help them. Some even believe alerting the lender will accelerate the process of losing their home.
TAX IMPLICATIONS FORECLOSURES
It almost seems impossible that after undergoing the misfortune of a foreclosure, you could get hit with the “double whammy” of having the Internal Revenue Service insist you pay income taxes or capital gains on the foreclosure transaction. You’ve just had your home taken away from you because you were unable to make all of your mortgage payments on time! How is that a red flag for the IRS? Here’s how it can happen. Your lender originally based your mortgage loan on the value of the property you were buying. When your property is foreclosed, the title changes hands from you to the lender and/or trustee. A new tax assessment is performed. Property values fluctuate, so it’s possible the value of your home has declined since you obtained your mortgage loan. In fact, the trustee will often have to sell it for less than its initial value — and less than the amount you owe — simply to get rid of it and keep from taking a loss. (This is known as an underbid. ) If the lender sells the property for less than it was worth when you bought it, it will look as though a large part of your mortgage debt was forgiven by the lender. In other words, the lender loaned you money that you don’t have to pay back now. To the IRS, that looks like income! It looks as though you’ve benefited from a sizeable windfall, and the federal government may demand its share of taxes for income and capital gains! Some exceptions apply. For example, if you’ve recently gone through bankruptcy or are otherwise dealing with insolvency, you might not be subject to this kind of taxation. This would be an excellent time to consult your accountant or tax attorney to find out whether you’re required to file special paperwork with the IRS and to determine what the impact might be on your individual situation.
POINTS TO REMEMB O REMEMBER:
• It’s usually not a crisis to be late on a mortgage payment. Repeatedly missing payments can trigger the bank to issue a “Notice of Default” and begin foreclosure proceedings. • Foreclosure usually takes some time. You probably won’t need to move out immediately, but you should immediately start working on your foreclosure strategy. • Foreclosure can subject individuals to a range of emotions. Controlling those emotions and making good decisions can set the stage for future success and happiness. • Don’t overlook the fact that foreclosure can have severe tax implications if debt that is now forgiven is considered to be income. • Move promptly and take control in response to a foreclosure. The sooner you explore your alternatives and take necessary steps, the better your outcome is likely to be.
CHAPTER 3 Reasons People Go eople Go into Foreclosur eclosure
WHAT CAUSES FORECLOSURES?
Buying your own home can be a wonderful, exciting adventure. Unfortunately, making regular mortgage payments and paying for home upkeep and improvements can add a lot of stress to your life and your budget. Statistics show that many homeowners already are at the financial edge: • An estimated 43% of American households spend more than they earn each year, according to the Homeownership Preservation Foundation data of 60,000 homeowners. • A MetLife study found that 52% of employees live paycheck to paycheck. • Nearly 42% of all American households do not have enough in liquid financial assets to support themselves for at least three months. • Overall, 46% of American households have less than $5,000 in liquid assets, including IRAs, according to researchers for the Levy Economics Institute of Bard College. If we consider the statistics above, it’s obvious that many homeowners are in tough financial situations even before a 15
possible foreclosure. Foreclosure has a way of ratcheting up our stress levels, and stress — an unwanted ingredient in any recipe — can cause us to respond emotionally. Supply and demand are always changing. In times when plenty of people have the resources and desire to purchase homes, builders start building more to sell. Inevitably, the housing market reaches saturation, the point at which the supply of available homes meets and even exceeds the demand. The overall economy can also have a dampening effect on the ability to afford homes. Times of high unemployment force many people to lose the incomes they rely on to make their mortgage payments. Even those with jobs may be “underemployed” or find their work hours and income reduced. Less money to spend means fewer people can afford to buy homes. When the real estate market slows down, sellers tend to lower their prices to make homes more appealing. A price drop lowers the values of existing homes, too. Many homeowners seek to refinance as a way to regain stability and meet their monthly financial obligations. If you have an adjustable rate mortgage, you might find the mortgage rate is rising, even as the value of your home is dropping. That takes an opportunity to refinance off the table. When housing values plummet — every bubble bursts, eventually — you can be left with negative equity. We call this an underwater or an upside-down mortgage, which means that you owe more on your mortgage than the house is worth. For example, your home might be worth $300,000, but you owe $350,000 on the mortgage. A study of Homeownership Preservation Foundation data of 60,000 homeowners nationwide revealed many “tipping points” that cause homeowners to go over the edge financially.
Tipping points that put homeowners over the edge:
• 32% experience a job loss • 25% experience a health crisis • 85% have already missed one mortgage payment • 50% have already missed two payments • Most have no savings, no available credit, and their extended families have limited resources. • Most have first-time loans, and most loans are less than three years old. • They may have already refinanced two or three times. Notice in the statistics above that most of the homeowners who risk going “over the edge” have had their first-time mortgages for less than three years. According to a Freddie Mac/Roper poll of more than 2,000 U.S. homeowners, 60% of respondents wished they understood the terms and details of their mortgage better. The “legalese” of a mortgage contract can be intimidating, especially for those who are new to homeownership. There are different reasons that could cause someone to default on their home loan. The number-one reason for foreclosure differs by state and region. Few choose to go into foreclosure voluntarily. It’s often an unpredictable result of a host of reasons. Let’s take a look at some of the current economic theories for the distressed housing market. As we discussed earlier in this book, when the economy collapsed some years ago, foreclosure became a fact of life for millions of Americans. About 250,000 new families enter into foreclosure every three months, according to the Federal Deposit Insurance Corporation (FDIC). The Great Recession showed us how bad 17
the situation for homeowners could become when a housing bubble bursts. A study in 2007 by the Federal Reserve Bank of Boston found that home values are a huge contributing factor to foreclosure. According to the study, homeowners whose home value dipped by 20% or more were about 14 times more likely to go into foreclosure than those who witnessed a 20% increase in the value of their home. During the Great Recession, many homeowners with “underwater” mortgages made the unfortunate decision to simply walk away and stop making their payments. They chose — or felt they were forced — to ignore the many harmful ramifications to their credit and personal lives. In some cases, selling their home did not seem like a viable option for them. Countrywide Financial also cites economic performance as a cause of foreclosures. In its 2007 survey, Countrywide found that the main reason for foreclosure, was “curtailment of income” (58% of the time). This far exceeds some of the other reasons, such as: • Illness or medical reasons made up 13% of foreclosures. • Divorce accounted for 8%. • An inability to sell the house clocked in at 6%. Surprisingly, payment adjustment on a mortgage was cited as a reason just 1.4% of the time. Other reasons noted include:
• Job loss • Job transfer or relocation • Deceased family member • Excessive debt and mounting bills • Maintenance issues they can no longer afford 18
Any one of these factors, even several of them at once, could cause homeowners to default on their home loans, putting them at risk of foreclosure.
POINTS TO REMEMB O REMEMBER:
• Many Americans live on tight budgets and are vulnerable to a downturn in the economy, housing market, or their personal financial situations. • Situations such as a job loss, a health crisis, or other problems can create a “tipping point” that will prevent you from making timely mortgage payments, or even compel you to default on your mortgage. • If you owe more on your loan than your home is worth, your mortgage is said to be “underwater” or “upside down.” • Homeowners whose home value dips by 20% or more are 14 times more likely to go into foreclosure than those who witnessed a 20% increase in home value.
CHAPTER 4 What Are Your Foreclosure Options? e Options?
Because the process of foreclosure can be lengthy (between 2–12 months), you may have time to save your home — particularly if you live in a jurisdiction that provides a long redemption period. You should act quickly and according to a plan. Depending on the process, either non-judicial or judicial, you’ll have a certain amount of time to get your affairs in order. If your goal is to save your home, as it should be, you need to ensure you start repaying property taxes and homeowner’s insurance, if both are applicable. Otherwise, you will compound your problems and be hit with additional tax liens, or even a liability suit or casualty loss.
READ THE FINE PRINT (ALL O RINT (ALL OF IT)
Once the process has begun, you must carefully review all the correspondence that you’ve received from your lender. Make notes on the phone conversations with your lender, who spoke with you, when, and what the nature of the call was. You should also review your mortgage documents as an added measure. Reviewing your documents will help you determine which steps are available to take. For example, if a power of sale clause is involved, then the sale of your home to pay off property taxes or your mortgage will pay back the payments that you’ve missed. If you can work around this, and get the money some other way for your property tax payments, then you’ll be able to pay them back without having to put your home up for sale and lose it. Do some additional research into the foreclosure laws that apply to your state, and 21
find out the information needed to answer the following questions: • What is the timeline for the foreclosure? • Are there any deficiency judgments applicable that will hold me personally responsible for the difference between my loan’s outstanding balance and what my home will sell for? • Is right of redemption available to me as a grace period in which I can reverse my foreclosure? During the 90-day waiting window, the homeowner has the right to redeem their mortgage. This means that you get the chance to pay off the mortgage and save your home. However, you have to pay the full amount you owe the lender. This includes the interest and any late fees as well as any costs incurred in the foreclosure process.
SHOULD YOU WALK AWAY?
It’s natural for your first reaction to the threat of foreclosure to be one of denial or avoidance. Early in the foreclosure process, it’s easy to get stuck in the denial stage, telling ourselves, “I can’t believe this is happening to me!” Sometimes, it seems that the easiest and least painful way to deal with the situation is to just do nothing. Some homeowners are tempted to just “walk away” from their mortgage when they can no longer make timely payments. If you’re thinking of walking away, there a few things you should know before you make that decision. A foreclosure dramatically affects your credit score. Your credit score will take a drop of 85 points to 160 points after a foreclosure (some sources say even more). This may affect your ability to buy
another home for years to come. A foreclosure remains on your credit report for up to seven years. Your credit scores can also affect other areas of your life, such as your insurance rates, phone credit and, in some limited cases, your ability to get a job.
OPTIONS AVAILABLE TO YOU
There are various alternatives to foreclosure that you may be able to pursue, including loan modification, deed in lieu of foreclosure, or short sale. We will examine each of these in depth in subsequent chapters. You could be able to negotiate your way out of a foreclosure. Contact your lender as soon as you realize that you’re having serious difficulty making your payments. You might be able to negotiate a new repayment plan or even refinancing that suits your current financial status. According to Mortgage Banking magazine, low- and moderate-income borrowers who engage in repayment plans are 68% less likely to lose their homes. Those are attractive odds. Different states have different foreclosure rules. Find out what your rights are and, most importantly, how long you can stay in your home once the foreclosure process commences.
A call to a foreclosure avoidance counselor is going to be one of the most important phone calls you will make during the process of foreclosure. Calling a foreclosure avoidance counselor, one who is fully approved by U.S. Department of Housing and Urban Development (HUD), will help you to figure out your situation. These counselors will explain the laws of foreclosure in your state, will typically work free of charge, will help you organize your financial documents, will help you discuss alternatives for foreclosure, and might represent you when it comes to
negotiations with your lender.
Once you begin working with one of these counselors, you need to let your lender know — right away. This will help your case when it comes to demonstrating your resolve. This may help you to avoid losing your home, as those who receive help with a counselor can even reduce the payments for their property tax or mortgage, when compared to someone who doesn’t use such help.
A WORD OF CAUTION
Be sure to check whether the foreclosure avoidance counselor is approved by HUD, because unsolicited offers for help are common when it comes to foreclosure rescue scams. Be careful whom you choose to handle your foreclosure strategy, because there are lots of scammers out there looking to profit from your misfortune. This is a very emotional period, and it’s easy to get confused, so get everything in writing and understand the fees and contract involved. Your attorney can be an essential resource in this effort. If foreclosure proceeds, you will get evicted from your home. You’ll consequently lose your home as well as the equity you have accumulated so far. In addition: • You could owe a deficiency balance after the foreclosure sale. This is the balance accrued if the sales proceeds are not sufficient to cover all costs. • You forfeit the ability to get a Fannie Mae (Federal National Mortgage Association) mortgage. Fannie Mae is a government-sponsored enterprise and leading source of financing for mortgage lenders.
If you do nothing in response to your foreclosure notice, your
house and property will go to a foreclosure auction, which we will discuss in the next chapter.
POINTS TO REMEMB O REMEMBER:
• Depending on the state in which you live, and the type of foreclosure action being taken, there may be time to save your home — if you act quickly. • “Walking away” from your mortgage and allowing your home to go into foreclosure can have severe consequences for your credit and future ability to purchase property. • Other options could be available to you, such as modifying your loan, negotiating a deed in lieu of foreclosure agreement, or conducting a short sale. It’s important to contact your lender early if you plan to enter into negotiations. • Use a HUD-approved foreclosure avoidance counselor and be wary of unsolicited offers to avoid foreclosure. A reputable attorney or real estate professional can be invaluable. • Foreclosure rules and guidelines vary by state. Familiarize yourself with your state’s requirements.
CHAPTER 5 What Happens at a Foreclosur eclosure Auction? uction?
If you are in default of your mortgage, your lender or their representative (called the “trustee”) will arrange a date for the house to be sold at a foreclosure auction (also sometimes called a “trustee sale.”) Your house will be sold at a public auction to the highest bidder, who must pay the full amount of the bid. The buyer then receives a trustee’s deed as soon as the sale is complete. This makes them the official owner of the home. The County Recorder’s Office records the Notice of Trustee’s Sale (NTS) and notifies you of the sale. The auction is likely to be held in the trustee’s office, on the foreclosed property itself, at a convention center, or even on the steps of the county courthouse. Notifications are also posted on the property and in the legal advertising section of the local newspaper. Many states give you — the homeowner (borrower) — the right of redemption, which means that you can halt the foreclosure process right up to the time of the auction if you can come up with the cash to pay the outstanding amount. You must research your state’s laws to determine whether this applies in your situation. At the auction, the highest bidder might purchase the home for cash. Relatively few buyers can pay cash on the spot, so the lender could enter into an agreement to take back the property from you, the borrower, in exchange for wiping out your debt. This agreement is known as a deed in lieu of foreclosure, and we’ll explore it in greater depth in Chapter 6. 27
HOW THE PRICE IS DETERMINED TERMINED
Unlike a traditional home sale, in which the seller compares properties to determine how much the home is worth, the lender will go for a different method. The starting bid will include the balance of the unpaid loan, interest owed, attorney fees, and costs incurred from the foreclosure process.
WHAT IF IT DOESN'T SELL?
In the event that no one buys the home, ownership reverts to the lender. This bank-owned or “real estate-owned” (REO) property means that the lender now assumes all property rights and responsibilities. Those responsibilities include property care and maintenance. The lender then usually works with a real estate agent to find a buyer. Online sites, such as Zillow, offer some bank-owned properties for sale. Some lenders resort to a liquidation auction, selling their REO properties at a private auction house or in a convention center. The home will be sold “as is.” This means it’s sold in its current condition and the lender will not be making any repairs or improvements. The bank also has the option to rent the property through a property management company, although this is rare.
VACATING THE PROPERTY
Generally, you will not be required to vacate the property on the date of the foreclosure auction. However, if you refuse to vacate at all, the bank — or the new owner with the winning bid — can initiate eviction proceedings on the day of closing. This process can take up to a few weeks. At the end of the process, you will be evicted — forcibly, if necessary. This is normally enforced by the local sheriff ’s department, whose deputies will either remove your possessions to storage or, more likely, place your belongings
(unprotected) by the curb in front of the house.
THE EVICTION PROCESS
Eviction won’t happen immediately. Eviction proceedings won’t commence until after the foreclosure sale takes place, and even then, you will be allowed to remain in the home a while. The timeline varies by state, by the length of your redemption period, and by the basic nature of the process — judicial or nonjudicial. Prior to the foreclosure sale, the lender can’t harass you or change the locks on your doors. In fact, the Homeowner’s Guide to Foreclosure, published by the California Department of Real Estate, urges former owners to stay in their homes at least until the sale is completed, stating that “moving from or leaving your home vacant prior to the foreclosure sale may cause a loss in property insurance coverage. Check with your insurance agent before moving out of your home.” In other words, if you leave the property, it may no longer be covered by your insurance. That leaves the home vulnerable to vandalization, criminal activity, and other problems. With few exceptions, homeowners who lose their properties through foreclosure behave responsibly. As we’ve noted, though, foreclosure can be emotional, especially for individuals already experiencing personal or financial stress. Some individuals are tempted to trash their homes and/or neglect basic maintenance and protection. Behaving vindictively can result in fines or even criminal charges. The lender or trustee might even decide to sell a damaged, run- down property for a lot less than what the borrower owes. You want the home to be in optimal condition, so that it will sell in foreclosure for the greatest amount and reduce your debt as much as possible.
Following the foreclosure sale, whether the property is sold as an REO or to a new individual owner, the courts may grant a deficiency order against you if the sale price fails to cover your mortgage balance. For example, if your mortgage balance was $370,000 and the house sold for only $350,0000, the lender could ask the court’s authorization to collect the $20,000 difference from you.
POINTS TO REMEMB O REMEMBER:
• If you are in default of your mortgage, your lender — or the lender’s trustee — will schedule your house to be sold to the highest bidder at a public auction. • If a third-party bidder does not purchase the property, its ownership reverts to the bank or other lending institution, who will most likely attempt to sell it in a liquidation auction or by other means. • You will ultimately be required to vacate the house. If you persist in staying there, you and your possessions will be forcibly removed. • Following the foreclosure auction, you might be held responsible for a deficiency judgment, which requires you to pay the difference if the sale does not cover your mortgage balance.
CHAPTER 6 Deed of Trust and T rust and Trustee Sales ee Sales Up to this point, we’ve made a fairly generic use of the term “mortgage” to mean the loan arrangement you make to buy your home. Traditionally, states have been “lien theory states.” In those states, you obtain a mortgage to purchase property, and you hold the deed to the property you buy. Based on your mortgage agreement, the lender has a lien against your property. Instead of a mortgage, many states have been converting to use of a three-party agreement called a “deed of trust” to secure the debt of the borrower, sometimes called the “trustor.” The bank or other lending institution (sometimes called the “beneficiary”) lends you the money to purchase the home. However, you give the legal title to the property to an impartial “trustee” to hold it for the lender. You, of course, have possession of the property. More than half the states in the U.S. have now adopted this system. There are some legal distinctions between a mortgage and a deed of trust that we need to discuss. In “title theory states,” where deeds of trust are used, the homeowner doesn’t really have the title to the property. Instead, the title is held by an impartial trustee as security for your loan. You might be given the title when you buy the property, but you then hand it over to the third-party trustee. In a few “title theory states,” the lender holds the deed instead of a third-party trustee. In these states, you might still have an actual mortgage, rather than a deed of trust. Obviously, this can be confusing, but if you’re in doubt about your status, your attorney or real estate professional should review your loan documentation and clarify the situation. Regardless of whether 31
the trustee or the lender holds your deed of trust, at the time you pay off your loan, a second deed will be issued to grant you full title and ownership to your home.
HOW DOES THIS AFFECT FORECLOSURE?
In these “title theory states,” if you default on your home loan, your lender can instruct the third-party trustee to sell your home. These proceedings follow a non-judicial format, meaning the courts don’t have to be involved. If you default on your loan, the lenders in most of these states follow a similar process. First, they will send you a Notice of Default and notify you that your home will be sold at auction. The trustee will then proceed to sell the property to the highest bidder. This process favors lenders because it enables them to sell the property while bypassing the time and hassle of going through the courts. In “mortgage states,” the lender must follow a judicial process by successfully suing you before foreclosing. This provides you the opportunity to be heard in court and possibly postpone the foreclosure a while. If the court decides in the lender’s favor, the lender can then auction your home.
Whether or not you live in a deed of trust state, the option of pursuing a judicial foreclosure is available to your lender. In some situations, the lender could decide it makes sense to take the longer route of going through the court. This is especially true if there is a deficiency (meaning, if your property does not sell for enough to cover your outstanding mortgage debt). For example, if you owe $350,000, but your home sells for only $330,000, the only way the lender can collect the $20,000 difference is to go through a judicial foreclosure process. That could include
garnishment of your wages until your debt is paid off.
DIFFERENT RIGHTS OF REDEMPTI EMPTION
Usually, in a deed of trust state, you’ll have the right to redeem your property by paying off the full balance right up to the time of the auction. After the foreclosure sale, you will have no recourse. In contrast, mortgage states usually allow you to redeem the property within a few months after it is sold by paying off the full amount you owe on your mortgage.
POINTS TO REMEMB O REMEMBER:
• A growing number of states are adopting the deed of trust model to secure the borrower’s debt. In most of these states, the title to the property is held by a third-party trustee until you pay off your debt. In other states, the lender holds the title until your debt is paid. • Lenders in title theory states are likely to pursue non- judicial foreclosures because they are quicker and avoid the court process. • All lenders have the option of initiating judicial proceedings — especially if the foreclosure sale of your house does not satisfy your entire debt to the lender. • The type of foreclosure the lender pursues could have ramifications for your finances and whether you have the option to redeem your house after the foreclosure sale.
CHAPTER 7 How to Avoid Foreclosur eclosure (Other Than Selling)
You don’t always want to (or even need to) sell your home when faced with a foreclosure, especially if you aren’t too deep into debt. So, then, what can you do to salvage your home?
The first thing you need to do when you realize that you’re not able to continue making your mortgage payments is to communicate with your lender about your financial situation. Find out from your lender if there’s anything that can be done to salvage the situation. Lenders generally want to avoid foreclosure, but will file a Notice of Default to protect their interests, whenever necessary. Why wait for the lender to notify you of the problem? If you realize that you will fall behind on your mortgage payment, then call your lender immediately. Don’t ignore notices from your lender and wait to talk to them when you’ve sunk in too deeply. Speak with a real estate attorney or HUD housing counselor to see where you stand. Housing counselors will help you make sense of the law as well as your options at the time. A counselor will also help you organize your finances and negotiate with your lender on your behalf.
Sometimes your financial crisis may just be a temporary setback and you could well be back on your feet soon. For instance, you may have lost your job, but you’ve managed to get another one, so 35
in just a couple of months, you may be able to get back to making regular payments. In such cases, you could ask your lender for forbearance. This kind of agreement allows you to temporarily delay payment or pay fewer monthly payments for a certain amount of time. The length of the repayment period varies, but on average it’s between three and six months. During this time, your lender agrees not to pursue foreclosure, and you, in turn, promise to catch up on the payments you’ve missed. Your lender will not foreclose on the property during this period. In return, you agree to recommence paying your mortgage in full and on schedule after the forbearance period is up. You also agree to pay extra to catch up on all missed payments. The process for seeking loan forbearance starts out the same way as getting a loan modification: Contact your lender and ask them to help you set up a plan. Just remember that forbearance is only a temporary solution. It won’t help you stay in a home you can’t afford.
REPAYMENT PLAN/SPECIAL FORBEARANCE
Special forbearance is similar to the forbearance plan above, but might offer greater relief to the borrower, such as a longer period of reduced or suspended payments while the lender works with you to create a new mortgage repayment plan. Ordinarily, you must have missed no more than 12 monthly mortgage payments. You need to prove that you lost your job or main source of income and/or you are experiencing unexpected monthly expenses. After this period, your lender will require you to start making higher payments (usually one-and-a-half times your original amount) until your loan is current.
Setting up a repayment plan may be a viable option to avoid
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