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Here are some basics to consider when you’ve defaulted on a note to a lender. The note involved in a foreclosure or repossession is an "I Owe You": a promise and an obligation for you to pay the debt owed to the lender that financed your property. A deed of trust, or mortgage on the property, is the security for that debt. If you’ve had troubles paying your obligations or are no longer capable of making the payments, you are facing a default.
When a default situation arises, it's always better to try to work out a practical solution with the lender. There are numerous ways in which creative problem solving may come into play. A first step would be to communicate clearly and early with the lender, call their 800 phone number on your monthly statement. You can consider alternatives such as a loan modification, waiving unpaid payments, extending the amortization or temporarily lowering the payments. Amending your agreement with the lender will provide you with relief and the lender will avoid all the fun and excitement of the foreclosure process.
There are several avenues a lender can pursue in enforcing their rights. When there’s a default on a note, their legal options with this default are:
1. Sue on the note
When a case goes to court, the lender can sue only on the note. They may institute a lawsuit in court against the payor or borrower, asking the court to require them to pay all money owed to the lender. A judgment can be obtained in court, requiring the full amount of the note payable to the lender. A judgment can attach all non-exempt assets owned by the borrower, allowing the lender to take those assets to satisfy the amount of the judgment. Exempt assets are those necessary for livelihood and are specified by state or federal law.
Many states will not allow such a suit. In many states, if a suit on the note is filed, a foreclosure on the Deed of Trust or Mortgage is barred. Other states will require a foreclosure process first, followed by a suit on the note. You should note that these types of suits are not the norm, as a foreclosure on a secured property is the primary means of satisfying the note.
2. Judicial foreclosure
An in-court foreclosure is called a judicial foreclosure, a lawsuit with specific parameters. Again the foreclosure laws will vary a great deal from state to state. A judicial foreclosure allows the lender to institute a lawsuit calling the entire note due and requesting a court ordered sale of the property to satisfy the note payoff.
When a judicial foreclosure permits the calling of the note due, taking the property may not be enough to satisfy your debt. The lender will gain a deficiency judgment against the borrower. A deficiency judgment demands that, if the lender does not receive all amounts due them from foreclosure sale of the property, the remaining balance of the debt should be paid by the borrower. The rules and requirements of both property types and borrower actions will vary greatly by state, so competent legal counsel is absolutely necessary.
3. Non-judicial foreclosure
With an out of court process, or non-judicial foreclosure, the process is usually handled by an attorney or a foreclosure professional. In some states, the process allows the lender to re-take the property without getting any other compensation from the borrower. Other states will allow a deficiency judgment after the foreclosure process is completed. This type of foreclosure occurs when borrower has no other obvious assets or ability to pay, when the property is worth more than the loan outstanding, or when it appears that this is the only legal option.
In general the borrower has rights to bring payments up to date, in which case, the note may not have to be paid off. In many states the borrower may also have redemptive rights after the process has occurred.
4. Deed in lieu of foreclosure
Another way of dealing with a mortgage default that will require the cooperation of both the lender and the borrower is to transfer the property by means of a deed in lieu of foreclosure. Fast and inexpensive (legal fees), both parties agree to transfer the property to lender, avoiding the time and expense of foreclosure. Most importantly, the borrower may avoid the possibility of the lender pursuing them for a deficiency judgment.
5. Bankruptcy
The possibility always exists that declaring bankruptcy may be the last form of refuge in a loan default. Lenders will want to avoid such a situation as bankruptcy creates numerous delays at a considerable cost. Competent legal counsel should be sought in determining if this is the right avenue for you.
6. Short Sale The short sale of real estate is not a questionable practice in today's softening real estate market, it’s a necessity. The short sale transaction is legal and a much more beneficial alternative to foreclosure or bankruptcy. Lenders are motivated to accept short sale offers for a number of good reasons. Short Sales can result in a win-win-win situation for all parties involved.
With all of the alternatives discussed above, the specific rules applicable to your state will determine whether you would face the risk of having a deficiency judgment ordered on behalf of the lender.
The result of a Foreclosure in Arizona is the bank taking your house. In Arizona, we are an anti-deficiency state, so they can only come after you for a deficiency if you didn't use the borrowed money to purchase or make improvements on your home. http://www.azleg.state.az.us/ars/33/00814.htm
If you let your house go to foreclosure sale, your credit report will be in terrible condition for many years to come, possibly 7-10 minimum. Future lenders will see your Foreclosure, and it will be very difficult to obtain any other kind of credit, car loan, or even rent a place to live. There is no upside to a completed Foreclosure.
What are the foreclosure alternatives for borrowers who are having trouble making their payments? What actions should a borrower take to pursue these alternatives?
There are several alternatives for a borrower that is having trouble making payments. If you are having difficulty making your mortgage payments, contact Ray Vallera immediately, to pursue options available. Some of the alternatives available include:
- Forebearance or Repayment Plan: A Repayment Plan is used when you have experienced a temporary reduction in income or financial hardship. This option is structured to cure the delinquency over a period of time by paying a full amount, plus a partial payment on the delinquent amount, each month. An initial down payment is required. The amount of the partial payment will be based on your financial situation and your initial down payment. It is important to note, a repayment plan will only be considered if there has been a positive change in your financial situation. For example, if you were previously unemployed but have found employment, we may consider a repayment plan provided you are able to make an initial down payment, and you have the ability to pay the increased monthly amount due.
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Loan Modification: If you have experienced a permanent reduction in income due to a severe medical hardship, loss of a spouse, legitimate increase in expenses, or other permanent hardship, a loan modification may be offered. Based on your individual financial situation, your lender may be able to change one or more of the original terms of your loan and reduce the monthly payment amount. It is important to note, a modification is done only in true hardship situations.
- Pre-Foreclosure Sale: "Listing your Property for Sale." If you believe that you will continue to have difficulty making your mortgage and real estate tax payments, and that your hardship or reduced income is permanent, you may want to consider listing your property for sale. Housing values in your area may have declined which may result in an offer to purchase that is less than the total debt due on the property. Lenders may accept less than the amount owed, but in order for consideration of this option, you must submit a package of financial information along with information about the proposed sale.
- Deed-in-lieu of Foreclosure: A deed in lieu of foreclosure is essentially a transfer of property to the lender in consideration for forgiveness of the debt. There are some advantages to this process over foreclosure. One benefit is that lender may waive any right to a deficiency judgment against you if the property is subsequently sold for a loss. A second advantage is that while a deed in lieu of foreclosure may be noted on your credit bureau record, you avoid having a completed foreclosure on your credit bureau record. They will consider accepting this option if the reason for the delinquency was beyond your control and you have been cooperative in seeking alternatives to foreclosure.
- Short Refinance: There are many residential lenders in your area that may be able to assist you in obtaining a third-party loan to payoff your defaulted loan with lender and give you a fresh start.
- Partial Claims-for FHA Loans Only: Lenders may be able to work with you to obtain a one-time payment from the FHA Insurance fund to bring your mortgage current. You may qualify if: Your loan is at least 4 months delinquent, but no more than 12 months delinquent, and you are able to begin making full mortgage payments. When your lender files a Partial Claim, HUD will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note, and a Lien will be placed on your property until the Promissory Note is paid in full. The Promissory Note is interest-free and is due when you pay off the first mortgage or sell the property.
- Full Reinstatement: Full repayment of all past due monies, including foreclosure expenses, to bring the loan current. This is the best option as it completely ceases foreclosure and any further collection action.
- Full Payoff: A Payoff, in which the note is paid in full, leaves no loan balance, and the lien against the real estate is released by the lender.
What documents must be provided by the borrower when discussing foreclosure alternatives with the lender?
Before I can recommend the most appropriate workout option, it is important that we have a complete understanding of your current financial situation. As part of this process, we may need you to provide certain documentation such as; monthly financial worksheet/ budget, tax returns, recent pay stubs, bank statements, and a hardship letter outlining the events which have caused you difficulty in maintaining your monthly payments. Additionally, please have your loan number available.
Foreclosure Consequences
It is very important to know what can happen when a lender forecloses on your home. Not only will you lose your home and all the money you have invested in it, but the foreclosure goes on your credit bureau record and may negatively impact your ability to obtain another mortgage in the future. In some states, you can be held liable for any loss the lender experiences in selling the home. These are good reasons to call us for help if you are behind on payments or close to falling behind in the near future. The process can be lengthy, typically 3 to 6 months or longer.
The lender is required to report all foreclosures and deeds-in-lieu of foreclosure to the Internal Revenue Service, and you may have increased tax liability, since the IRS may view these events as forgiveness of debt. For now the "Mortgage Forgiveness Debt Relief Act of 2007" has addressed this issue and under qualified circumstances you may be eligible to have this waived or Forgiven. |
