Foreclosure and Foreclosure Options
Are there really options to foreclosure? The answer is “sometimes.” It can depend on where the borrower is in the foreclosure process. It can also depend greatly on the laws of the state where the property is located. Whether there is any alternative to being foreclosed upon will mostly depend on whether the lender is willing to work with the borrower to avoid foreclosure. Unfortunately, the lender isn’t required to help the borrower avoid foreclosure. If a borrower fails to make payments, the borrower is in default of the agreement between lender and borrower. In the event of the borrower’s default, the only thing that is certain is that at some point the lender will foreclose.
I have heard from a number of homeowner borrowers who have contacted foreclosure option or foreclosure defense companies located outside of the State of Minnesota with the hope of finding a solution to their foreclosure problems. The foreclosure laws of each state are different and the foreclosure process varies from state to state. These out of state companies are not necessarily operated by attorneys or by attorneys licensed in the State of Minnesota. Many of these business operators claiming to be consumer advocates and while they might have good intentions, they are not attorneys and do not understand that the foreclosure laws of one state don’t necessarily apply to another. These companies will tell consumers to search through their loan documents and find their promissory “note” that accompanies the mortgage or that the consumer might be a victim of a “robosigned” foreclosure. These foreclosure defenses depend on the foreclosure laws and foreclosure process of the state where the property is located.
As consumers, we often discuss our home mortgage as being the loan we obtained in order to make a purchase. We tend to say “I’m getting a mortgage.” As a borrower, what you received was a loan. In exchange, you gave the lender a mortgage on the property. The mortgage is the secured interest which gives the lender the power to foreclose on the property in the event of default. This is important because it makes a difference in understanding your rights as a borrower. The borrower is the mortgagor and the lender is the mortgagee. When reading documents and correspondence from your lender, remember which one you are.
So what are the options to foreclosure?
First, if you believe that you made all loan payments as required, it is important to communicate with the lender before they begin the foreclosure process. Once the process has started, it is much more difficult to communicate with the lender (even if the borrower is right) and it can require the services of an attorney and, potentially, a formal legal action to correct the problem and defend it as a wrongful foreclosure. Assuming that the borrower is in default or is at risk of default, the borrower may be able to take some action. Not legal action; communication action.
Loan modification programs are still available and they don’t necessarily require that the borrower be in default. This is a commonly misunderstood point. Borrowers have been known to intentionally delay payment because they think it will qualify them for a modification. While “imminent” default is a factor in whether a lender is willing to grant a modification, there are other qualifying factors including whether the borrower has a “hardship” and using the borrower’s income and expense information to determine whether the borrower qualifies for a different payment plan. Even if applying for a government-sponsored modification, such as HAMP (the Making Homes Affordable program), the qualification process will vary from lender to lender. Federal guidelines help the lender make the decision of whether to grant a modification, but the lender’s goal is to select qualified candidates. If a borrower can no longer afford their home and the situation is long-term (as opposed to a short-term hardship situation), the lender may prefer to foreclose.
The short sale is a tool used by many homeowners and real estate professionals to help market a property for sale at a price that is less than what the borrower owes the lender. It leaves the borrower short on repaying the lender and the lender must agree to the short sale because all money is due to the lender upon sale of the property. A short sale won’t work for everyone. The lender must be approached prior to deciding to attempt a short-sale. The lender will have requirements for working with potential short sale sellers and the lender may reject any offer received. The lender will want to see the property placed on the market with a licensed real estate professional and that the property is included in the local multiple listing service (MLS). The lender may require that the property be listed for a period of time prior to looking at any offers to purchase. Typically, two months. As with traditional home sales, the homeowner is typically responsible for paying the real estate commission for the sale of the property. If a seller is successful in using the short sale process, the seller must leave the property when the transaction is complete (closing has taken place). Depending on the laws of your state, a short sale can take less time than foreclosure, meaning that the homeowner will need to find alternative housing much sooner than if dealing with the foreclosure.
There are also tax considerations related to the unpaid debt. The Internal Revenue Service (IRS) considers discharged debt to be a taxable event. While there are certain temporary Federal rules in place that will help some homeowners avoid the additional Federal tax, state income tax may apply. It is important to seek competent legal and tax advice when facing foreclosure or attempting to avoid foreclosure.
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