Real Estate Foreclosure Questions
I haven't been able to make my mortgage payments, and I'm about to lose my home. Who can help me?
Answer: Contact one of the REF.org-approved foreclosure avoidance agencies near you.
Foreclosure is to shut out, to bar, to extinguish a mortgagor's right of redeeming a mortgaged estate. It is a termination of all rights of the homeowner covered by a mortgage. Foreclosure is a process in which the estate becomes the absolute property of the lending institution.
Foreclosure numbers are growing daily. Of the one hundred twenty or so million homes in America, more than 4% or roughly 4.8 million of them are facing foreclosure . Some of these homeowners are able to work their way out of foreclosure , however, according to MBA there were about 500,000 homes that went through foreclosure last year. Foreclosure threatens these homeowners because they are late or seriously behind on their mortgage payments.
The Foreclosure process begins when the homeowner fails to make payments of the money due on the mortgage at the appointed time. This may be due to several reasons. Unemployment, divorce, medical challenges, terms of the loan, sick of property management, and even death.
Foreclosure is applied to any method of enforcing payment of the debt secured by a mortgage, by taking and selling the estate. Borrowers and lenders now face a challenging situation. Both seek a compromise that permits a win-win outcome. The borrower to keep his home or business, the lender to keep receiving mortgage payments.
Foreclosure proceedings typically start with a formal demand for payment which is usually a letter issued from the lender. This letter of notice is referred to as a Notice of Default (NOD). Depending on your state, the lender will issue this notice when the homeowner has been 3 months delinquent on the mortgage payments. Keep in mind that the notice is a threat to sell your property, terminate all your rights in that property and evict you from the premises.
Sometimes, a lender may not pursue foreclosure even though your loan payments are behind. Although a lender isn't required to accept any offers or renegotiate the terms of your loan, there may be alternatives to foreclosure.
A free foreclosure avoidance ebook is available via Matt Lesko Here. Talk to a counselor who will be able to help you determine if any of the above alternatives are right for you.
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Lending and mortgage origination practices become "predatory" when the borrower is led into a transaction that is not what they expected. Predatory lending practices may involve lenders, mortgage brokers, real estate brokers, attorneys, and home improvement contractors. Their schemes often target people who have small incomes but substantial equities in their homes.
Products themselves are not predatory. For example, a loan with a variable interest rate can be a very good financial tool for many borrowers. However, if the borrower is sold a loan with a variable interest rate disguised as a mortgage loan with a fixed interest rate, the borrower is the victim of a bait and switch or predatory lending practice. In short, this type of conduct is nothing more than mortgage fraud practiced against consumers.
Consumers can be lured into dealing with predatory lenders by aggressive mail, phone, TV, and even door-to-door sales tactics. Their advertisements promise lower monthly payments as a way out of debt, but don't tell potential borrowers that they will be paying more and longer. They may target minority communities by advertising in a specific language, or target neighborhoods with high numbers of elderly homeowners, or homeowners with little access to credit.
The Importance of Disclosures
Within three days of filling out a loan application, your mortgage broker or lender must provide you with a written document giving you most of the information you will need to know about the loan.
These disclosures are required to be provided at two major points in the mortgage transaction. Disclosures made at the very start, or point of origination, are designed to give the borrower advance notice of the loan program and the costs associated with the program. Disclosures made at the end, or loan closing, are designed to confirm for the borrower that they are receiving what they expected. If disclosures are not provided, do not do business with this lender or broker.
Trust Deed foreclosure is different than that of a mortgage foreclosure because there are no courts involved. Simply put, most investors refer to trust deed foreclosure as a third party action.
Investors use different terms when dealing with a trust deed foreclosure . The borrower is called the trustor, the lender is called the beneficiary, and the third party representative (the one who is holding the title) is called the trustee. The trustee, who represents the lender or beneficiary, is brought on for the sole purpose of holding the title of the property as a security measure against the debt.
Because there is no court action involved, the trustee has the authority to sell the property for the beneficiary in the event the trustor fails to make his monthly mortgage payments. As with any trust deed foreclosure , first the trustee will issue a Notice of Default (NOD) to the delinquent borrower and records it. Usually the trustor has 90 days to cure the loan and pay all the penalties. Once that time is up, they don't play Mr. Nice Guy anymore. They will post a notice of sale on the front door of the property, the sale of the property is advertised in the newspaper to attract the biggest investors, and after a 3 week publication, the property is auctioned off on the courthouse steps. The highest bidder walks away with the property.
Obviously, most lenders like the trust deed foreclosure process better, because they don't have to wait 6 months to even years before they can begin the foreclosure process. Time is money.
Mortgage foreclosure simply means the deed can only be foreclosed through court action. Mortgage foreclosure is usually referred to as a judicial foreclosure.
A mortgage is a security document that allows the borrower to keep title of the property while using the property as security or collateral for a loan. The lender then places a lien on the property in the event the owner does not pay the agreed payment. When the borrower pays off the loan, the lender gives the borrower a satisfaction of mortgage that removes the lien from the property. About half the states in the U.S. use mortgage foreclosure as the means of satisfying the loan balance.
As with most mortgage foreclosure lawsuits, it starts with a summons and a complaint is issued to the borrower and any other parties with inferior rights in the property. Usually the lenders attorney is the one who issues the notice. The complaint is usually filed in the court where the trial is to be held. Here is the interesting part. Once the borrower has been notified, he or she has 20 days to respond back to the court challenging them on the mortgage foreclosure lawsuit. Once this occurs, the court now has 40 days to respond back to the borrower. Keep in mind that each correspondence must be legit and deal with some specific part of the complaint. This process may go back and forth as long as the borrower finds something erroneous with the complaint. This slows a mortgage foreclosure greatly because it must go through the court system. It may go as long as a year if needs be or even longer. Bottom line, you as the investor needs to contact the borrower or homeowner during this time and negotiate a purchase of the distressed property. This is when the homeowner is greatly motivated and must make a decision quickly.
Private mortgage insurance or "PMI" policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and your house isn't worth enough to entirely repay the lender through a foreclosure sale. Most lenders require PMI on loans where the borrower makes a down payment of less than 20%.
Premiums are usually paid monthly and typically cost around one-half of one percent of the mortgage loan. You can normally cancel the PMI once your equity in the house reaches 20-25%, so long as you've made timely mortgage payments.
Save money by asking your mortgage company to cancel your private mortgage insurance (PMI).
Private mortgage insurance (PMI) protects the lender if you default on your mortgage payments and your house isn't worth enough to entirely repay the lender through a foreclosure sale. Lenders often require PMI for loans where the down payment is less than 20%. They add the cost to your mortgage payment each month. PMI can usually be canceled after your home's value has risen enough to give you 20 to 25% equity in your house.
Let's start with the IRAs. Under the 1997 Taxpayer Relief Act, certain homeowners can withdraw up to $10,000 penalty free from an individual retirement account (IRA) for a down payment to purchase a principal residence (though you might have to pay income tax on the amount withdrawn). If you've got a Roth IRA, however, you must have had the account for five years to make tax-free withdrawals.
This $10,000 is a lifetime limit -- and the money must be used within 120 days of the date you receive it. The law limits use of this benefit to so-called "first-time homeowners" -- but generously defines these as people who haven't owned a house for the past two years. If a couple is buying a home, both must be first-time homeowners. Ask your tax accountant for more information, or check IRS rules at www.irs.gov . Also see the article, Getting Your Retirement Money Early -- Without Penalty .
If you have a 401(k), you have two options. One is to do a so-called hardship withdrawal -- but, because this would subject you to taxes and a 10% penalty, we recommend you avoid this.
You can also take an ordinary loan from your 401(k) plan without penalty, as long as meet certain conditions and you promise to pay it back. Borrowing against your 401(k) offers several advantages:
Keep in mind, however, that you'll need to repay the loan with after-tax dollars, and you'll forego the earnings on the 401(k) money you withdraw -- until it is paid back.
Ask your employer or plan administrator whether your plan allows loans. If it does, the maximum loan amount under the law is one-half of your vested balance in the plan, or $50,000, whichever is less. (If, however, you have less than $20,000 in your plan, your limit is the amount of your vested balance, but no more than $10,000.) Other conditions, including the maximum term, the minimum loan amount, the interest rate, and the applicable loan fees, are set by your employer. Any loan must be repaid in a "reasonable amount of time," although the Tax Code doesn't define what is reasonable.
Be sure to find out what happens if you leave your job before fully repaying a loan from your 401(k) plan. If a loan becomes due immediately on your departure, income tax penalties may apply to the outstanding balance -- but you may be able to avoid this hassle by repaying the loan before you leave the job.
Several federal, state, and local government financing programs are available to home buyers. The two main federal programs are:
VA loans. U.S. Department of Veterans Affairs (VA) loans are available to men and women who are now in the military and to veterans with honorable discharges who meet specific eligibility rules, most of which relate to length of service. The VA doesn't make mortgage loans, but guarantees part of the house loan you get from a bank, savings and loan, or other private lender. If you default, the VA pays the lender the amount guaranteed and you in turn will owe the VA. This guarantee makes it easier for veterans to get favorable loan terms with a low down payment. For more information, check the VA's Website at www.va.gov or contact a regional VA office for advice.
FHA loans. The Federal Housing Administration (FHA), an agency of the Department of Housing and Urban Development (HUD), insures loans made to all U.S. citizens, permanent residents, and non citizens with work permits who meet financial qualification rules. Under its most popular program, if the buyer defaults and the lender forecloses, the FHA pays 100% of the amount insured. This loan insurance lets qualified people buy affordable houses. The major attraction of an FHA-insured loan is that it requires a low down payment, usually about 3% to 5%. For more information on FHA loan programs, contact a regional office of HUD or check the FHA website at www.hud.gov .
For information on other government loans, contact your state and local housing offices. They often have programs available for first-time home buyers who are purchasing modestly priced properties. To find your state housing office, check the State and Local Government on the Net Directory at http://statelocalgov.net . Or, go to your state's home page, where you may find the listing for your state's housing office.
With a fixed rate mortgage, the interest rate and the amount you pay each month remain the same over the entire mortgage term, traditionally 15 or 30 years. A number of variations are available, including five- and seven-year fixed rate loans with balloon payments at the end.
With an adjustable rate mortgage (ARM), the interest rate fluctuates according to the interest rates in the economy. Initial interest rates of ARMs are typically offered at a discounted ("teaser") interest rate that is lower than the rate for fixed rate mortgages. Over time, when initial discounts are filtered out, ARM rates will fluctuate as general interest rates go up and down. Different ARMs are tied to different financial indexes, some of which fluctuate up or down more quickly than others. To avoid constant and drastic changes, ARMs typically regulate (cap) how much and how often the interest rate and/or payments can change in a year and over the life of the loan. A number of variations are available for adjustable rate mortgages, including hybrids that change from a fixed to an adjustable rate after a period of years, or "option ARMs" that allow you to choose, on a monthly basis, whether to pay a minimum amount, an interest-only amount, an ordinary principal plus interest amount, or an accelerated payment amount.
It depends. Because interest rates and mortgage options change often, your choice of a fixed or adjustable rate mortgage should depend on:
When mortgage rates are low, a fixed rate mortgage is the best bet for many buyers. Over the next five, ten, or thirty years, interest rates are more apt to go up than further down. Even if rates could go a little lower in the short run, an ARMs teaser rate will adjust up soon and you won't gain much if you plan to stay in the house more than a few years (the broker can tell you your break-even point). In the long run, ARMs are likely to go up, meaning many buyers will be best off locking in a favorable fixed rate now and not taking the risk of much higher rates later.
Keep in mind that lenders not only lend money to purchase homes; they also lend money to refinance homes. For example, if you take out a fixed rate loan now, and several years from now interest rates have dropped, refinancing will probably be an option.
For calculators that will help you make refinancing decisions, see the list of online mortgage websites in our foreclosure resources page.
There are several downsides to refinancing. Unless you can negotiate a low-cost refi, you may have to pay the same fees and points as for an original mortgage. This means you may reduce your monthly payment right away but not actually begin to save money on the refi for several years. (Again, your broker can tell you when you will break even.) So, if you think you will be moving again soon, it may not make sense to refinance.
Second, if you default on a refinanced mortgage, your position under your state's law can get worse. In California, for instance, when a home buyer defaults (stops paying the mortgage) on a purchase mortgage, the lender can foreclose on the house but take nothing else from the home buyer, while on a refinanced mortgage it can go after the home buyer's cash and other assets, after the house, to satisfy the debt.
