Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.
Formally, a mortgage lender (mortgagee), or other lien holder, obtains a termination of a mortgage borrower (mortgagor)’s equitable right of redemption, either by court order or by operation of law (after following a specific statutory procedure).
Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender tries to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, it is a cloud on title and the lender cannot be sure that they can repossess the property. Therefore, through the process of foreclosure, the lender seeks to immediately terminate the equitable right of redemption and take both legal and equitable title to the property in fee simple. Other lien holders can also foreclose the owner’s right of redemption for other debts, such as for overdue taxes, unpaid contractors’ bills or overdue homeowner association dues or assessments.
How Foreclosure Works
When you buy real estate (also called real property), such as a home, you might not have enough money to pay the entire purchase price up front. However, you can pay a portion of the price with a down payment, and borrow the rest of the money (to be repaid in future years).
Homes can cost hundreds of thousands of dollars, and most people don’t earn anywhere near that much annually. Why are lenders willing to offer such large loans? As part of the loan agreement, you agree that the property you’re buying will serve as collateral for the loan: if you stop making payments, the lender can take possession of the property in order to recover the funds they lent you.
To secure this right, the lender has a lien on your property, and to improve their chances of getting enough money, they (usually) only lend if you’ve got a good loan to value ratio.
First, the trustee’s fees and attorney’s fees are taken from the surplus fund. Included in the trustee’s fees are mailing costs, services rendered and filing fees. Next, the trustee distributes money to pay the obligations secured by the deed of trust, which is the remaining balance on the loan. After the lender is paid, the trustee distributes funds to any junior lien holders, such as home equity lines of credit. Finally, the homeowner may claim surplus funds from the equity in the property. You must notify the trustee within 30 days of the foreclosure auction to place a claim on the surplus funds.
What Happens to Equity During Foreclosure?
Home equity stays the property of a homeowner even in the event of a mortgage default and foreclosure on the home. But the foreclosure process can eat away at the equity. The following five points explain what home equity is, what happens to it during foreclosure and options to protect.
What Is Equity?
Equity is the difference between the current market value of your home and the amount you owe on it. It is the portion of your home’s value that you actually own. For example, if you purchased a $200,000 home with a 20 percent down payment of $40,000 and a mortgage loan of $160,000, the equity in your home is $40,000.
Equity is the value of the property minus any liens or amounts owed on it for mortgages and liens. When your mortgage loan balance drops below the appraised value of your property, you have equity in your home. Conversely, if you owe more on the mortgage than your home is worth, you have no equity. Unless you have significant equity in your property, you can expect to lose that money during the foreclosure process.
In Foreclosure, Equity Remains Yours if there is any to get
Foreclosure is a legal preceding that follows your being in default on your home loan. What constitutes default varies with each loan and with the laws of each state. But in every case, if you have not made a determined number of payments, the lender places your loan in default and can begin foreclosure.
If you cannot get new financing or sell the home, the lender can sell the home at auction for whatever price they choose. If the home does not sell at auction, the lender can sell the home through a real estate agent.
Remember that equity is what you own of your home’s value. In any of the above cases, if the house is sold and there is money left over after the loan and all fees and penalties are paid, that is equity and that is yours.
Fees Cut Into it
your equity is being reduced before foreclosure starts. For most home mortgages, there are late-payment penalties. So, if you are late on your loan and it goes into default, for example, after four months of missed payments, the late-payment penalties for those months are added to the total loan amount and will be subtracted from the proceeds of any sale. That reduces your equity.
Additionally, the lender can charge fees related to processing the late payments, the declaration of default, the foreclosure proceedings and expenses of the sale against your equity. This can amount to tens of thousands of dollars, which will be subtracted from anything owed you after a foreclosure sale.
Low Home Appraisals Reduce it
if your home goes into foreclosure, the lender will have the home appraised for an auction sale. Typically, a lender will accept an offer of 90 percent of the home’s appraised value. Lenders do not want to own your home, particularly if it is a time of declining home values. It is typical for the lenders to accept low home appraisal values so that the home will sell at auction and not have to be listed with an agent. That reduced appraisal value means a lower sales price that yields a lower amount of money left over after the loan and fees are paid.
When You Foreclose, You Still Get Your Money, If There Is Any
Alright, let’s talk through a scenario. You bought a house 15 years and got a 30-year mortgage. You lost your job 6 months ago and have fallen behind on your payments. You decide that foreclosure is the best option for you.
You have a bunch of equity on the home and the value of your home has slowly increased over the last 15 years. So, let’s say you bought it for $200,000, and now it values at $265,000. You have been a faithful mortgage payer for 15 years and only owe just over $120,000 on the home. Well, that means you have $145,000 in equity on the home.
Now that you are foreclosing though, don’t you think you should get that money back? It would only make sense.
Alright, first off, because you are so behind on your mortgage, you have late fees. Those end up affecting your equity. With those fees affecting the equity, your equity will start to decrease. So, if we use the above scenario, let’s say those late fees equated to $10,000. You now only have $135,000 in equity.
On top of those fees, the process of foreclosing actually costs money too. So, you start to lose more and more of your equity. This could be upwards of $20,000, leaving you with only $115,000 in equity.
The Home Appraisal
When a home goes up for foreclosure, the lender wills often the take the lowest appraised values. This way they can sell the home quickly. So, let’s say the lowest appraised value of your home ends up being $250,000 now. Well, that is a $15,000 decrease in your equity. You are looking now at $100,000 in equity.
On top of that, the lender usually will take an offer of only 90% of the appraised value so that they can sell the home quickly. So, the house then sells for $225,000. This would leave you with only $75,000 in equity.
Options to Consider
As you can see, you just lost half of your equity by going forward with your foreclosure. But, what if we told you there was another way? You can put your house on the market with a real estate agent and sell the house before the foreclosure sale. This would be best as you can protect and get your equity from your property. If you don’t want to sell, look at filing a bankruptcy case. You can file a chapter 7 or a chapter 13 bankruptcy case which will stop the foreclosure.
Before facing foreclosure, refinance your loan to an affordable payment if you can or take advantage of a loan modification program. If this is not possible, sell the home as soon as you can. By selling the home, you are reducing the fees and penalties you owe, setting the price yourself at which you want to sell and avoiding the legal costs of foreclosure. All of this can add to the equity you take out of your home.
Consequences of Foreclosure
The main problem with going through foreclosure is, of course, the fact that you will be forced out of your home. You’ll need to find another place to live, and the process is stressful (among other things) for you and your family.
Foreclosure can also be expensive. As you stop making payments, your lender will charge penalties and legal fees, and you might pay legal fees out of pocket to fight foreclosure. Any fees added to your account will increase your debt to the lender, and you might still owe money after your home is taken and sold if the sales proceeds are not sufficient (known as a deficiency).
Foreclosure will also hurt your credit scores. Your credit reports will show the foreclosure, which credit scoring models will see as a negative signal. You’ll have a hard time borrowing to buy another home for several years (although you might be able to get certain government loans within one to two years), and you’ll also have more difficulty getting affordable loans of any kind. Your credit scores can also affect other areas of your life, such as (in limited cases) your ability to get a job or your insurance rates.
Let’s say you own a home currently valued at $500,000, that you owe $200,000 on it, and that you have a 6% loan. Now, for whatever reason, you can’t make the payments, and for whatever reason, you don’t sell while you have the opportunity before the trustee’s auction.
In California, you are going to be four months behind before the Notice of Default happens. So that is four payments of $1200. Furthermore, when you are fifteen days late you owe a 4% penalty, or $48, and when you are thirty days late, the missed payments start accruing interest. So at the point that the Notice of Default is possible, you owe $204,777.83.
From Notice of Default to Notice of Trustee’s Sale is another 60 days, but before that happens, the bank is going to hit you with $10,000 to $15,000 in administrative fees for going into default. Check your contract; it’s in there. Let’s say $12,000, and now you owe $216,777.
Add another two months of delinquent payments, and penalties as of 15 days after. So as of the time the Auction actually happens, you owe $219,447. Furthermore, to make the auction happen, they will charge you about another $15,000. This covers the expenses of making the auction happen, of which the most noteworthy is the appraisal. At this point, you owe $234,447.
The appraisal bears special mention. Not only is there zero pressure to get a good value, the bank wants that appraisal to come in nice and low. They want the property to sell at auction, and if maximize the chance of it selling at auction. Every once in a while questions about low appraisals at trustee sales hit the site. The short answer is Microsoft Standard: “It’s not a bug, it’s a feature!” and from the bank’s point of view, it is. So even though the property might sell for $500,000 in the normal course of things, the appraisal might come in at $440,000, meaning that someone has to bid $396,000 in order to buy the property at auction. The appraisal might be even lower, but let’s say $440,000.nobody bids 90% of the appraisal price, and then they own it and have to go through the rigmarole of hiring an agent and selling it. So that appraisal is going to come in as low as is reasonable.
Foreclosure Real Estate Attorney Free Consultation
When you need help with a foreclosure, quiet title case, eviction, boundary dispute, or other real estate law matter, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506