| California Foreclosure Process: 5 Stages- (PDF)
Foreclosure vs. Shortsale – (PDF)
Basic Foreclosure Process and related Terms:
Default:
The homeowner must miss a payment, default on payment is the only way a property can enter the foreclosure process. This can also be a missed payment to local taxing authorities, a condo association or homeowners association. The moment that a mortgage payment is late, the borrower is in default of the terms of their loan and remains in default until all arrearages, interest charges and related fees are repaid or until foreclosure occurs. When a defaulted mortgage is brought up-to-date, the default is said to be ‘cured’.
Legal Notice: The lender or foreclosing party must notify the owner that they are entering into the foreclosure process. This can be done through either personal service of a document or if the owner cannot be located through publication in a legal journal.
Notice of Trustee's Sale: Begin 'Notification Period'
This notice is placed on the property (usually the front door), and it is published once per week for three weeks in a newspaper local to the property. Within 14 days of posting the Notice of Trustee’s Sale, the document must also be recorded with the county recorder. The notice will include the time, date and location of the sale. The trustee must schedule the sale at least 21 days in the future.
Trustee’s Sale:
Twenty-one (21) days after posting the Notice of Trustee’s Sale, the trustee can sell the property at public auction. The sale usually occurs in front of the county courthouse in the county where the property sits.
Bank Sale or Auction Date:
The homeowner is informed that he has a bank sale or auction date at which points the foreclosing mortgage company will gain control of the property.
Redemption Period:
Not all states have a redemption period. In cases where there is, this is a period of time in which the homeowner may present payment to the bank and regain possession of the property. California does NOT allow redemption.
Note: It is recommended that you speak with an attorney or title company to get an idea of current foreclosure timelines. It is not uncommon for foreclosures to actually take longer than legislated. Also ask this professional at what point does the homeowner have the opportunity to stall a foreclosure.
Reasons to Avoid Foreclosure
Borrower will always have to disclose that they have had a foreclosure on any future mortgage application
Credit scores will be lowered by 300+ points
A foreclosure is the one credit report item that is almost impossible to have ‘repaired’
Many employers run credit checks on prospective employees and foreclosure is one of the top items that will put a potential job in jeopardy
Security clearances and government positions including by not limited to military and law enforcement can be jeopardized by a foreclosure
Options for Homeowners in Foreclosure
Reinstatement:
If the reason that a homeowner missed payments was ‘temporary’ and it has been resolved, then they have the option to ‘reinstate’ their mortgage right up to the bank sale. In order to reinstate a mortgage, the homeowner has to pay all missed payments, late fees, and legal fees that are due up to the date that the loan is reinstated. The owner requests this amount from his mortgage company in the form of a reinstatement letter. This letter will typically expire after thirty days since the amount owned is time sensitive. A simple reinstatement will require a onetime payment of all delinquent funds in full.
Forbearance (or re-payment plan):
Borrowers experiencing temporary financial hardship can attempt to negotiate forbearance with their lender. If the lender agrees, the foreclosure will be postponed while the borrower makes payments in accordance with the agreement. This usually requires income documentation from the homeowner showing that they will be able to comply with the terms of the repayment plan.
Sell the Property:
If the buyer has the equity in their property, they can sell it and cure the foreclosure.
Rent the Property:
In some cases, a homeowner facing foreclosure will have payments low enough to allow him to rent the property and keep up the mortgage payments. This is a short term solution since when taxes and insurance payments come due; many homeowners cannot afford to pay the tax and insurance bills. This causes the mortgage company to force /place an escrow account on the property
Refinance:
If the homeowner has sufficient equity and income and their credit has not been too badly damaged they may be able to refinance. This is also typically a short term solution, since the payments on the property go up considerably due to the refinance amounts.
Mortgage Modification:
In some cases where the homeowners do have the means to afford their mortgage payments or very close to their mortgage payments, their mortgage company may qualify them for a mortgage modification. A loan modification is very similar to a lower interest refinance where the lender lowers the interest rate on the existing loan in order to lower the payments. The homeowner will have to qualify for a modification by sending in proof of income, and expenses. If this option is available, it is an excellent option for homeowners to keep their properties.
Short re-fi:
I This relatively new process involves the refinance of a home with a reduction in the principal balance and often the interest rate as well. The borrower will have to qualify for this process both in showing a hardship as well as showing the ability to pay the new mortgage often through a fully documented qualification process.
Deed-in-Lieu of Foreclosure:
A Deed-in-Lieu of Foreclosure is sometimes referred to as a ‘friendly foreclosure’ since the homeowner gives the deed back to the bank. This may prevent the banks from having to go through a lengthy foreclosure process and in exchange, they will sometimes forego their rights to a deficiency judgment. The mortgage company agrees to take the deed back in exchange for the property and they typically have no further recourse. This solution only works in cases where there is one mortgage and there are no liens (or very small liens) on the property or in rare cases, where a first mortgage holder will negotiate with the second mortgage holder. This happens infrequently and previously was unheard of; however this market is changing daily.
Bankruptcy :
A bankruptcy may stop a foreclosure and allow a homeowner to reorganize his debt and keep his property. The reality however is that most of the time this is not the case and the bankruptcy only stalls the foreclosure. If the homeowner is not able to make the payments after bankruptcy, the house will foreclose anyway.
Short Sale :
When a borrower owes more on a property than it is currently worth and one of the above solutions do not apply to their situation, there is the option of pursuing a short sale. This is a negotiated agreement between a mortgage lender and a borrower that allows the borrower to sell the property secured by the mortgage for an amount that’s ‘short’ of the amount owned on the loan. Proceeds from the sale –minus reasonable selling costs—are accepted by the lender as payment in full, and the borrower avoids foreclosure.
Short Sale explained
What is a Short Sale?
A homeowner is ‘short’ when a borrower owns an amount on his/her property that, when combined with closing costs and commission, is higher than the current market value
A negotiation is entered into with the homeowners’ mortgage (lender) company or companies to accept less than the full balance of the loan at closing. A buyer closes on the property and the property is ‘sold short’.
What a Short Sale is NOT?
It needs to be clear to the homeowners; a ‘short sale’ is a way to avoid foreclosure. It is NOT a ‘get out of mortgage (loan) free card’….in order to have a short sale approved, the borrowers have to either be in, or headed for foreclosure. This means that the borrower has to have a valid financial hardship for why they can’t pay their mortgage. A borrower without a financial hardship that is upside down on their mortgage and wants to ‘sell’ is NOT A POTENTIAL SHORT SALE, they are dissatisfied homeowners. Unfortunately, the borrowers will either have to wait the market out, bring cash to closing or in the most extreme of cases, let the property go into foreclosure.
Mortgage Forgiveness Debt Relief Act of 2007
January 1, 2007 – January 1, 2010 – Eliminates Phantom Tax on Debt Cancellation in mortgage discharge. (Individuals must qualify)
- Debt must have been a debt incurred to acquire a principal residence
- Cancelled debt up to $2,000,000 is eligible
- Set of rules for determining the allowable amount of the exclusion for taxpayers with non-qualifying indebtedness and taxpayers who are insolvent
- Debt from a second (non-acquisition) mortgage or HELOC is not eligible
- Cancelled debt from investment properties and second homes is not eligible
- Deficiency Judgment (does not apply in California)
A deficiency judgment is a court action against a borrower for the balance of a debt owed when the security for a loan is not sufficient to pay the debt. This means if the property sells for less than what is owned to the lender, the borrower will be personally responsible for repayment after the deficiency judgment is filed.
California does not allow deficiency judgments on PURCHASE MONEY LOANS secured by a trust deed or a mortgage.
Purchase Money Loan:
The mortgage you originally used to purchase your home is a purchase money loan. Home equity lines of credit (HELOCs) and refinanced mortgages typically are NOT considered to be purchase money. Why is this important? California’s rules against deficiency judgments do not apply to non-purchase money loans. Thus, if you r lender recovers less in foreclosure than you own on your non-purchase money loan, the lender can sue you in court for the difference. If you aren’t sure of the status of your loan and you’re facing the possibility of foreclosure, see an attorney right away to determine if the bank has the option to sue you for your deficiency.
In rare cases lenders pursue a deficiency judgment against borrowers and attempt to collect the amount that was ‘short’. This does require a separate action to be filed in court causing the mortgage company to incur further expense. The mortgage company is also acutely aware of the borrower’s inability to pay, so it is common belief that they see further collection as fruitless. It is also important to point out that a short sale should get the lender more money than a foreclosure. Where the bank has a right to pursue a deficiency judgment in a short sale, they also have the same right in a foreclosure. When considering all consequences, a short sale is almost always better than a foreclosure.
HOW TO GET STARTED…
Make the decision to contact a trained, experienced Short Sale real estate agent
Review the process and details of the financials/ insolvency issues of the borrower
Review a Conventional Short Sale Process – flowchart
Sample flowcharts for …
With single mortgage
With first and second mortgage
What to expect once borrowers have been ‘qualified’ as potential short sale sellers
Sellers will be guided through the process of preparing the volumes of paperwork and documentation to support the requirements of the lenders (mortgage bankers). It may take months for the process to unfold from the initial interview, through the listing process and bank document preparation items and finally the negotiation and approval stage of the bank…..before completing the escrow process and closing. (see example below)
Typical process flow when involved in a Short Sale…
- List the property
- Input to MLS, begin marketing
- Complete the Short Sale package and send to bank
- With Offer and executed contract to bank
- Borrower to submit Authorization letter to bank, for clearance of realtor to discuss matters as a 3rd party with authority to speak to bank on borrowers’ issues
- Appraisal or BPO by bank
- Approval by bank
- Adjust payoff to title
- Final Inspections
- Close of Escrow.
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