What is foreclosure?
Foreclosure is a legal process to terminate a property owner’s right to real property used as security for an unpaid loan. If your real estate is foreclosed, the bank will ask the court to transfer title to the property from you to them. In all likelihood, your credit will be affected and the bank will pursue a deficiency judgment against you if there is no equity in the home to cover their loss and you agreed to be personally liable for the debt. Thankfully, there are some alternatives to foreclosure that you should discuss with your lender.
If a complaint in foreclosure has been filed against you, we recommend contacting a real estate attorney who offers a free consultation so you can explore your rights and remedies. You should do so immediately because once you have been served with a complaint, typically you only have twenty days in which to answer the complaint or you may forego any legal rights you may have.
What is a deed in lieu?
A deed-in-lieu of foreclosure is a process whereby the lender agrees to accept the deed (or title to the property) in lieu, or as an alternative to pursuing a legal action for foreclosure. In today’s market, there are other legal issues surrounding this type of alternative that you should discuss with an attorney including the issue of a potential deficiency judgment.
What is a deed for lease?
Similar to a deed in lieu of foreclosure, a deed for lease is simply an agreement whereby you agree to transfer the deed (title) to your home to the foreclosing lender. The lender is then the owner of the home. In exchange, the lender agrees to lease the home to you for a certain period (typically one year) and for a certain rental amount (an amount determined by the market). The bank becomes the “landlord” and you are the “tenant.” At the end of the lease period, the bank can either extend the lease terms or require you to move. The firm has been involved in deed for lease workouts. They are a great alternative to foreclosure for many people. If you want to stay in your home but are facing foreclosure, this could be a viable option for you. Call us.
What is a loan modification/forbearance agreement?
Your lender may be willing to change or modify the terms of your loan. This is often a good option for someone who was unable to make their payments or is struggling due to a temporary inability to pay due to a lay off or job change. The lender may be willing to forego current payments by adding them to the end of the loan. It is important to talk to your lender about these options. People often ask our office if they qualify for a loan modification or forbearance plan, and the answer is generally “no, if you do not ask.”
What is a loan assumption?
A buyer is willing to assume the terms of your existing loan with the lender. Your loan documents will state whether or not the loan may be assumed and, if your loan is not assumable, you may still inquire if the lender would agree to permit a buyer to assume the terms of your loan.
What is a short sale?
In a short sale, the property is sold for an amount that is less than the amount that was borrowed or is less than is currently owed on the property. Hence the word “short” sale. The sales price is not enough money to satisfy the money owed to the lender(s). This type of sale can be very appealing to a homeowner, but there are some pitfalls that arise when borrowers do not understand the difference between a Promissory Note (“Note”) and a Mortgage. It is important to understand these differences.
What is the difference between the Note and Mortgage?
When a house is purchased, a borrower signs two important documents at the closing pertaining to the monies borrowed. The two documents are the Note and the Mortgage. While most borrowers think that the Note and Mortgage are one and the same, they are actually two very different documents which obligate the borrower in different ways. Let me explain…
The Note is the loan document the borrower gives to the lender in exchange for the borrowed money. It is their promise to pay back the borrowed money, hence the term Promissory Note. The lender also requires security for the loan; the security for the loan is the real property or the house. The security document is called the Mortgage. The Mortgage is not a loan document; it is the document that identifies the security for the loan. The Mortgage “follows the Note” in that it is usually required in addition to the Note and results from the loan. The Mortgage, unlike the Promissory Note, gets recorded with the court.
If the bank approves a short sale, will I be responsible for the difference or “short” amount?
In the context of short sales, borrowers may assume when the lender agrees to a short sale that the lender is also agreeing to release the borrower from their obligations under the terms of their Note. However, the lender could agree to release the Mortgage and allow a short sale to go through, but not agree to release the borrower from their Note. This would take an unsuspecting seller (borrower) by surprise a few months later, especially if they assumed that because the lender agreed to the short sale, their loan (Note) was satisfied at the time of the sale.
It is important that everyone clearly understands where they stand as to their loan(s) and their Mortgage(s) when they are negotiating a short sale. When a lender agrees to a short sale and agrees to release the Mortgage from the real property, make certain that the lender also agrees in writing to forgive any debt and release the Note. The same written releases must be obtained for any second and third Notes and their related Mortgages.
Understanding the myriad of issues that arise in a short sale is just one of the reasons to consult a real estate attorney when facing these real property issues.
What is a deficiency judgment?
A deficiency judgment typically follows a legal action in foreclosure. The lender sues the borrower for the difference between the amount originally loaned to the borrower and the amount of the security interest.
Borrowers should be aware that even if you simply gave the keys to the lender and the lender didn’t have to go through the foreclosure process to get the title to the home, the lender may still have legal right to obtain a judgment against you for the remaining balance on the loan.
You may also be liable to the insurance company if your lender required PMI insurance and the insurance paid the lender to cover a deficiency.