• What is Foreclosure? Overview for Owners and Renters

    Foreclosure is the legal means a lender can utilize when repossessing the home, forcing the homeowner to vacate the home. Specifically, a homeowner loses the right to redeem a mortgaged estate and the homeowner loses all rights covered by the mortgage. In the instance when the property value is less than the amount owed, the lender may obtain a deficiency judgment, which will require the homeowner to make additional payments to the lender after losing the home. A deficiency judgment is a judgment to recover an amount not covered by the value of security put up for a loan or installment payments.

    Often, foreclosure occurs when a homeowner does not stay current with home mortgage payments. Usually, when a homeowner fails to stay current with mortgage payments, the homeowner may be facing unemployment, divorce, medical issues, issues with the loan terms, inadequate property management, or illness.

    Foreclosure begins with a lender’s formal demand for payment in writing, which is called a Notice of Default (NOD). Usually, lenders send an NOD when a homeowner is behind on mortgage payments for three months. An NOD is typically a threat to sell the property, to terminate the homeowner’s rights in the property, and to evict the homeowner.

    Foreclosure law is governed by bankruptcy laws and the Soldier and Sailors Relief Act. The Bankruptcy Code is federal law with state laws determining certain aspects of bankruptcy. The filing of a bankruptcy proceeding will initiate an automatic stay, which will toll a foreclosure proceeding. Sometimes, the automatic stay can be lifted or removed if the lender holds equity in the mortgaged property. In a bankruptcy proceeding, the mortgage holder may be able to foreclose on the property if there is no equity. The Soldiers and Sailors Relief Act of 1940 provides certain protections to homeowners with mortgage loans while on active duty in the armed forces. In a foreclosure action, a service person can request a court to set aside a default judgment. A lender seeking to initiate foreclosure must file an affidavit indicating that the homeowner is not on active duty in the armed services. In the instance the homeowner or mortgagor is in the armed services, he or she must attend or be represented at the foreclosure hearing, making a foreclosure by power of sale unavailable. If the court determines that the homeowner’s ability cannot meet the mortgage terms due to military service, the foreclosure action will be stayed as long as the homeowner remains in the service.

    Foreclosure and deficiency judgments may negatively impact a homeowner’s credit and may seriously affect the homeowner’s ability to qualify for credit. If a debt is cancelled or forgiven, the amount cancelled is taxable. However, the Mortgage Debt Relief Act of 2007 allows taxpayers to exclude the income received from discharged debt arising from the principal home. Any debt that is lessened by mortgage restructuring or mortgage debt forgiveness will make relief possible to the homeowner. In the instance where the loan is forgiven, it is considered reportable income and thus, is taxable. This amount of cancelled debt must be reported to the IRS.

    How Foreclosure Affects Renters

    Foreclosure can also affect an individual renting property, resulting in evictions from property going into foreclosure. If a landlord defaults and initiates foreclosure proceedings, the bank as the new landlord will take eviction action and sell the property as quickly as possible. Another alternative a bank may choose is to hire a managing company to run and maintain the property. This would serve as a financially smarter decision to manage the property in order to recover potential losses. Banks will usually choose to sell the property rather than manage it.

    When a landlord’s property is foreclosed, the tenant’s lease is deemed as terminated, regardless of any time left on the lease. However, move out is not immediate due to the notice of termination required by the new landlord. The Mortgage Reform and Anti-Predatory Lending Act, enacted in 2009, requires 90 days notice to tenants. The tenant must leave after notice is given or the tenant will face eviction proceedings, which can hurt the tenant’s ability to find future housing.

    Following a foreclosure action, the tenant may file suit against the former landlord for failure to deliver the property provided within the lease agreement and may recover damages in small claims court. The tenant may recover damages, such as moving costs, expenses for an apartment search, the difference between the new rent and old rent under the lease with the former landlord, application fees, and other reasonable costs associated with the eviction and relocation.
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