December 1st, 2023
Contents
December 1st, 2023
For homeowners or landlords who have a Mortgage Deed on their property, it is common to end up struggling with the monthly mortgage payments for many reasons. Some of the most common reasons include a tenant who stops paying rent, poor cash flow associated with the property, losing a job, suffering from an economic downturn during the pandemic, or other personal financial hardships. For people who start to fall behind on payments and realize foreclosure is becoming a possibility, they must understand their rights and responsibilities during the foreclosure process. This guide will walk through the basic foreclosure process and some of the most commonly asked questions about foreclosure and its consequences.
There are several stages to a foreclosure, which can take months or even years to complete:
1. Payment default. When the borrower misses a payment, that is known as a default on the mortgage. The bank will often just charge late fees and send reminders at first. It usually takes a few months before the lender will pursue additional action. The Mortgage Contract or local law may also specify a minimum number of missed payments before the lender can take additional steps.
2. Notice of Default. A Notice of Default is a formal notice that the mortgage is past due. It is somewhat similar to a landlord sending a Pay or Quit Notice. The Notice of Default gives the borrower a deadline by which they must bring the mortgage current or face the start of the foreclosure process. Banks often will not send this notice until the borrower has missed three or more payments.
3. Notice of Trustee's Sale or Judicial Foreclosure. The next step in the foreclosure process depends on the state. In some states, the bank can send a notice informing the borrower that it plans to sell the property. In addition to notifying the borrower, the bank will advertise the sale or auction to the public. In other states, the bank must go to court and get a judge to approve a foreclosure sale. The time for this process varies, especially when judicial approval is required. This usually takes at least several months.
4. Trustee's sale. Most foreclosure sales happen at auctions. The lender sets the opening bid based on what the borrower owes, the costs of the sale, and market conditions. At the end of the auction, the winning bidder becomes the new owner of the property. If the property does not sell at auction, the bank will become the property's new owner. The bank may hold the property in its investment portfolio as a rental property or attempt to make it more attractive for a future sale.
5. Eviction. After the sale, the new owner generally has the right to evict the current occupants. If the borrower occupies the home, this can happen within a few days. If the home is a rental property occupied by a tenant, the tenant often has rights that prevent an immediate eviction.
In short, a homeowner may be evicted from their property after a foreclosure takes place. However, a foreclosure can be a very long and complicated process. Foreclosures typically take much longer than simple renter evictions, but may similarly require individuals to vacate the property.
Foreclosures take longer because they must follow the legal process required for a bank or other financial or lending organization to take the property that was used to secure the mortgage in the Mortgage Agreement. The most common reason that property is foreclosed upon is that the homeowner has stopped paying the mortgage.
In most states, a foreclosure is a process that requires the court to find that the bank or other lending institution has the right to foreclose and take the home. That process can take a significant amount of time. Generally, during this time that the foreclosure process is taking place, the homeowner still has the right to remain on the property.
In some states, banks and lending organizations are permitted to use a non-judicial foreclosure, which does not involve the court. It is a much faster process that homeowners have to consent to as part of getting the initial loan.
Once a foreclosure is finalized, some states also provide homeowners with the right to a redemption period.
A redemption period is a period of time during a foreclosure where the homeowner can keep their property by paying off the remainder of their debt.
During the redemption period, the homeowner may continue to live in the house or the house can be occupied. In most cases, if the homeowner can come up with the funds to pay off their mortgage during the redemption period, they can stop the foreclosure and keep their home.
Foreclosure laws vary from state to state and not all states have redemption periods. In the states that do have a redemption period, this can be a long time, in some regions a year or more. Some states also allow the homeowner to waive their right to a redemption period. Many banks and lending institutions will regularly ask potential homeowners to do this as part of the loan application process.
The redemption period is a protection for homeowners. However, if a homeowner does not have a redemption period or the redemption period expires and they cannot pay off the mortgage in its entirety, they may still be evicted from their home by foreclosure.
A homeowner may still need to make their mortgage payments, even after the lender goes through the foreclosure process. There are generally two reasons that this might be the case:
1. The homeowner wants to stay in their home and they want to renegotiate their mortgage payments or pay off their prior lender.
2. The homeowner owes a deficiency judgment because they were underwater on the mortgage.
Being underwater on a mortgage means that a homeowner owes more on their home than it is worth.
If the home is sold to a third party and that sale does not cover the full amount of the mortgage, the former homeowner may still owe the bank or their lending institution money for a house they no longer own. These payments are called deficiency payments.
Some banks or lending institutions may agree to modify a loan to avoid foreclosure. Modification may include lowering the homeowner's interest rate or extending the loan to reduce the monthly payments. A bank's willingness to modify a mortgage generally depends on the borrower's credit, income, and other factors. While it is a routine practice for a bank to approve a mortgage modification to avoid foreclosure, it is not a guarantee. In addition, landlords who own a rental property facing foreclosure may not be able to rely on federal and local programs designed to help owners stay in their primary residences.
The foreclosure rules that protect homeowners may not be as beneficial to a rental property owner. The law treats a rental property as a business or investment rather than as the borrower's primary home. The foreclosure generally happens more quickly in this situation and the property owner has fewer legal protections. The exact differences vary from state to state, but one common distinction arises in situations where the foreclosure sale does not raise enough money to pay off the mortgage. In many states, a bank may not be able to sue a homeowner if this happens after foreclosure on their primary residence. However, those protections may not apply if the foreclosure is on a rental property or second home.
Unlike a purely commercial property, a rental property usually has at least one person living in it. The tenant may even have dutifully and reliably paid their rent on time with no way of knowing the landlord was behind on mortgage payments. Due to this possibility, tenants are afforded legal protections in a foreclosure to minimize the impact on their living situation.
There are two major things a tenant needs to know in a potential foreclosure: who to pay rent to and how long they can stay.
Tenants continue to pay rent to the rental property owner even with a foreclosure pending. After the foreclosure sale, the new buyer or the bank will be entitled to collect the rent. In some situations, the bank may have a clause in the Mortgage Agreement giving them the right to collect rent payments before the foreclosure sale. Tenants are entitled to at least 120 days' notice in advance of any foreclosure sale. In addition, tenants must be given written notice of any changes to who they pay rent.
How long a tenant may remain in a foreclosed property depends on what kind of lease they have and who buys the property. The federal law Protecting Tenants at Foreclosure Act (PTFA) provides the following timelines, which states can extend but not shorten:
If the landlord lives on the property, the tenant generally still gets the protections of their lease. However, tenants may have difficulty in this situation because the arrangements are commonly informal and they may not have a written Lease Agreement.
Landlord buying a foreclosed property with an existing tenant often agree to new lease terms with the tenant. They can accomplish this by using either a simple Lease Amendment Agreement or an entirely new Residential Lease Agreement. The tenant, in turn, has the right to say no and keep the terms of their current lease for as long as allowed by law.
If a property owner is not able to bring their mortgage current, they may have other options. If the original lender will not modify the loan, the property owner may be able to refinance with another lender. Another option may be to seek out a real estate partner or private investor to help resolve the debt in exchange for equity. The property owner may also be able to sell their property at a more favorable price than they might expect from a foreclosure sale. The benefits of selling a property before a foreclosure is finalized may include:
A property owner might want to ask any friends, family, or even tenants if they would be interested in partnering, investing, or buying the property. This may be an especially good idea of the owner will be discounting the sale price to ensure a quick sale and knows someone who would be interested.
Foreclosure can be a stressful and scary process, affecting not only the homeowner but any tenants they may have on the property. For this reason, it is important for property owners to be familiar with the process, their rights and responsibilities, and the rights and responsibilities of their tenants.
About the Author: Malissa Durham is a Legal Templates Programmer and Attorney at Wonder.Legal and is based in the U.S.A.