In Texas, most foreclosures on real property are non-judicial foreclosures, with the exception of foreclosures on a home equity loan. A non-judicial foreclosure simply means that the lender or mortgage company can proceed against a homebuyer without a court order or any court supervision. The triggering of a foreclosure can only happen if the homeowner is in default on his or her note or loan agreement. The mortgage company or lender determines if a default has occurred based on the terms and conditions outlined in the note or loan agreement, or deed of trust.
A. FORECLOSURE UNDER A DEED OF TRUST
A deed of trust is an instrument used to secure the payment of a note involving the sale and purchase of real estate. It provides the conditions which can tigger the default provisions to begin the foreclosure process.
I. MUST I BE DELINQUENT BY MORE THAN ONE PAYMENT BEFORE MY MORTGAGE COMPANY CAN INITIATE FORECLOSURE PROCEEDINGS?
This depends upon the exact language of the real estate lien note you signed at the time you bought your home. Almost without exception all loan notes (excluding FHA- and VA-insured loans) provide that the purchaser is in default upon failing to make any installment that comes due. Therefore, as a strict legal matter, a mortgage company may
initiate foreclosure proceedings upon default in payment of even one installment.
As a practical matter, however, most mortgage companies will not immediately institute foreclosure proceedings. They will generally first make some efforts to contact the borrower and attempt to have the borrower bring the account current. If these efforts prove unsuccessful, then the mortgage company will institute foreclosure proceedings.
If your mortgage is FHA-insured or VA-insured, the mortgage company may not institute foreclosure proceedings until you are at least three payments delinquent.
II. What must a mortgage company do to foreclose on my home?
Notice of Default
The mortgage company or lien holder must first serve you with written notice by certified mail. The notice must inform you of your default under the deed of trust and give you at least twenty days to cure the default. If you fail to cure the default within the twenty day period, the mortgage company may then declare the entire debt due pursuant to a notice of acceleration and post the property for sale, pursuant to a Notice of Sale. The first notice of default and second notice of acceleration can be combined in the same letter.
Notice of Sale
The mortgage company must give you at least twenty-one days notice of the date of the sale. Notice runs from the date the mortgage company mails the certified mail notice; not from the day you receive the notice. By law, foreclosure sales are only held on the first Tuesday of each month. Even if the first Tuesday is a holiday, the sale will still be conducted and the sale is still valid.
III. Certified Mail
The mortgage company's only obligation under the law is to place the notices, properly addressed, to you in the mail by certified mail. If you refuse to claim properly addressed notices, you simply will not know of the actions being taken by the mortgage
company. You should always claim any certified mail you may receive from your mortgage company. Refusal to claim the certified mail does not protect the homeowner.
The certified mail notice must inform you that your property will be sold at a public sale at an auction held between 10:00 A.M. and 4:00 P.M. on the first Tuesday of a month. The sale must begin not earlier than the time stated in the notice of sale and not later than three hours after the specified start time.
V. Posting Notice of Sale at Courthouse
In addition to sending you notice, the mortgage company or lien holder must, at least twenty-one days before the date of the sale, post notice of the sale at the courthouse door of the county in which the property is located and file a copy of the notice in the office of the county clerk of the county in which the property is located.
VI. Right of Redemption
Texas does not give you any right to redeem the property after a foreclosure sale except if property is sold by a taxing entity for nonpayment of taxes. The purchaser at the sale is under no obligation to sell back the property after the foreclosure sale.
VII. Do I have to move out of the property on or before the date of the Foreclosure Sale?
You do not have to move before the date of the foreclosure sale. If you are still in the property after the foreclosure sale, the buyer at the foreclosure sale cannot simply set you out. The buyer must first give you a three day notice to vacate the premises. If you do not vacate within the time period given to you by the buyer, the buyer may file an eviction lawsuit with the justice of the peace court. You will receive a copy of the eviction papers from the constable. Those papers will tell you what you must do to request a hearing.
VIII. Do I have a right to sell my property prior to a Foreclosure Sale?
You have an absolute right to sell the property before any foreclosure sale. Of course, once the mortgage company has accelerated the indebtedness, it can insist on payment of the entire accelerated unpaid remaining principal balance and refuse to allow reinstatement upon payment of only the delinquent balance.
IX. What are my choices in the Event I face Foreclosures?
One, if you wish to keep your home, you should first attempt to work out a reinstatement agreement with the mortgage company. You should do this as soon as you fall behind on your payments and not wait until you are many months delinquent. Many mortgage companies will enter into reinstatement agreements on terms which allow the buyer to resume future monthly payments and pay the delinquency over a period of months.
Two, you can file a Chapter 13 bankruptcy before the sale and keep your home, provided you have sufficient monthly income to make future monthly payments as they come due and also pay some additional amount each month on the delinquent balance. You should resort to a Chapter 13 bankruptcy only if you have attempted to work out a reinstatement agreement with the mortgage company and it has been unwilling to accept an agreement that you can keep. With a Chapter 13 bankruptcy, you will propose a plan to the court under which you will pay the full delinquent balance in a period not to exceed five years. Whether a Chapter 13 bankruptcy is possible will also depend on what other debts you may have.
Three, you can sell your home, provided you can do so before a foreclosure sale. This will require that you examine the deed of trust to see whether it requires the permission of the mortgage company to approve any sale or the credit of the buyer. If you have considerable equity in your home and have decided that you will be unable to make
future monthly payments, you should seriously consider selling to realize at least some equity.
If you decide to sell, you should work with a realtor who can advise you about the value of your home and the price needed for a quick sale. If you do sell to someone who does not pay off the note but assumes the note, be aware that you remain liable on the note. This means that if the buyer should default in the future on the payments, the mortgage company has a right not only to look to the buyer for payment of the note but also to look to you.
Four, approach the mortgage company and ask whether it will accept a deed in lieu of foreclosure. You should consider this choice only if you have decided that you simply cannot keep your home and do not have sufficient equity to make a sale worthwhile. If you use this approach, try to get the mortgage company to agree that the deed in lieu of foreclosure is in consideration of full and complete satisfaction of the entire debt. If the deed in lieu of foreclosure does not recite that it is in full satisfaction of the debt, you remain liable for any deficiency.
Five, On 4/24/96 Congress terminated the HUD mortgage assignment program. As of 5/1/96 homeowners with FHA insured mortgages facing foreclosure for reasons beyond their control may no longer apply directly to HUD for relief.
X. Do I have any additional rights if my mortgage is FHA-Insured or VA-Insured?
If your FHA-insured mortgage becomes delinquent after 3/1/97, the lender must give the homeowner notice of a payment delinquency no later than the end of the first delinquent month. The lender must review all loans in default for 3 months to determine if any "loss mitigation" options to help avoid foreclosure are appropriate (see below). The consideration of all "loss mitigation" options must be documented before the lender initiates foreclosure.
"Loss mitigation" options for FHA-insured loans include the following:
Special Forbearance: If the borrower has experienced an involuntary reduction in income or an increase in living expenses and the lender determines the borrower has a reasonable ability to pay under the terms of a special forbearance agreement the lender may enter an agreement for a period of reduced or suspended payments for a period of up to 18 months from the date of the oldest unpaid installment but the total reduction may not exceed the equivalent of 12 months at the regular payment rate (PITI). The agreement must be signed no earlier than 120 days and no later than 210 days from the date of the oldest unpaid installment. The lender may enter a special forbearance agreement even if foreclosure proceedings have started but in such cases may require the borrower to pay foreclosure costs.
Mortgage Modification: A lender may agree to a modification of the existing mortgage regardless of the reason for the delinquency. A modification could eliminate the delinquency by making it payable over the remaining term of the loan or a term not exceeding 30 years (which may also reduce the future installments).
Partial Claims: If the borrower is at least 4 months delinquent but the total delinquency does not exceed the equivalent of 12 regular payments, and the homeowner is able to resume making full monthly mortgage payment (and a special forbearance agreement or loan modification agreement will not resolve the delinquency), the lender may make a claim to HUD for payment of the delinquency. HUD pays the lender the delinquency and the homeowner gives HUD an interest-free mortgage for that amount. The HUD mortgage may provide a specific future payment date but may not require payment until transfer of ownership or the payoff of the first mortgage.
Pre-Foreclosure Sale: If the homeowner is at least two months delinquent and cannot otherwise resolve the default, the lender may offer the homeowner 90 days to pursue a pre-foreclosure sale option during which time the lender may waive payment of the mortgage and may provide assistance towards seller-paid closing costs. HUD requires in such cases that the gross sale price must be at least 95% of the "as-is" appraised value of the home.
Deed In Lieu: A voluntary transfer of the property to the lender to avoid foreclosure can be considered when the homeowner is in default and does not qualify for any other loss mitigation options or upon the failure of a pre-foreclosure sale. If the deed in lieu is done expeditiously it should be in full satisfaction of the FHA-insured mortgage but be certain before you sign. If there is a second or subsequent lien this option may not be available or, if available, the deed in lieu would not eliminate the homeowner's liability for the debts secured by a second or subsequent lien.
If your mortgage is FHA-insured, you have an absolute right to reinstatement up to the date of the foreclosure sale if you tender the full amount of the delinquent balance, late charges, attorney's fees, and other costs of the foreclosure sale incurred prior to the payment.
If you become delinquent on a mortgage loan insured by the Veterans Administration, the Veterans Administration does have the discretion to pay off the mortgage company and become your lender and grant you forbearance relief. However, it is extremely rare that the Veterans Administration will do this. You may ask the Veterans
Administration to do this but it would be prudent to pursue all other options as well, since this relief will likely be denied. If you pursue this choice, you may wish to seek help from your Congressman, since it is completely discretionary with the Veterans Administration whether it will help you in this manner.
How are the proceeds from a foreclosure sale divided?
After the sale, the proceeds are used to pay off any advertising expenses or commissions, the unpaid principal, interest, and attorney's fees due on the note as provided for by the note. Any remaing balance is forwarded to the borrower or homeowner. If the proceeds are not enough to pay off the note, attorney fees, and advertising costs, the lender can sue the borrower for the difference. This is called a difficiency suit.
XI. Are there any consequences resulting from a Foreclosure Sale?
Yes, there are several possible consequences.
One, you will be liable for any deficiency resulting from the sale. In other words, if your property sells at the foreclosure sale for less than the amount owed, the mortgage company may file suit within two years of the foreclosure sale to seek a judgment for the deficiency amount remaining unpaid by the sale proceeds. In such a suit you may present evidence of the fair market value of the property as of the foreclosure sale date. If the court determines the fair market value is higher than the sale price that higher price is used to determine if any deficiency amount is due.
If a court judgment forecloses the lien and orders the foreclosure sale and the property is sold for less than the amount due on the mortgage resulting in a deficiency amount due, within 90 days of the sale you may file suit in the District Court where the property is located to present evidence that the fair market value of the property is higher than the foreclosure sale price. If you prove a higher fair market value, that higher price is used to determine if any deficiency amount is due.
Two, there are possible tax consequences from a foreclosure on your home, although the IRS does not strictly enforce them. Lenders are required by the IRS to send a Form 1099-A, Information Return for Acquisition or Abandonment of Secured Property, to the IRS and the buyer. Those forms include the date the lender acquired the property
or found out it had been abandoned, the balance of principal outstanding, the appraised value, and a description of the property. The lender states on the form whether the buyer is still considered liable for repayment of the debt.
The tax consequences vary depending on whether the lender sues you for a deficiency. If you are sued for the deficiency, you do not owe any taxes to the IRS on the deficiency because the lender has not "forgiven" the debt.
However, if the lender does not sue (i.e., forgives the debt), the difference between the fair market value of the property (not necessarily the amount paid at the foreclosure sale) and the amount you owe represents "income" to you. (The IRS will almost always assume that the fair market value is the price paid at the foreclosure sale.)
For example, if you owe $60,000.00 on property with a fair market value of $50,000.00 that sells at a foreclosure sale for $40,000.00, the income to you is the difference between the fair market value ($50,000.00) and the total debt you owe ($60,000.00). Thus, in this example, you would have income of $10,000.00.
There are two important exceptions which absolve you from having to pay taxes on the deficiency. If you file bankruptcy OR are technically insolvent at the time of the sale, you are not liable for any taxes. In almost all cases, an individual whose home is sold at a
foreclosure sale not making payments should be able to show he was insolvent at the time of the sale.
The taxes are due for the calendar year in which the debt is forgiven. The debt is forgiven when the statute of limitations runs (two years from the date of the foreclosure sale) or, alternatively, when the lender files the Form 1099 indicating the debt is forgiven.
These tax consequences apply to home foreclosures. The tax consequences on rental property foreclosures are different, and you will have to consult with an accountant or tax attorney for advice.
Three, the mortgage company may report the foreclosure to a credit reporting agency. This will result in a lower credit rating when you are seeking other credit extensions. The foreclosure may remain on your credit report for 7 years from the foreclosure or from the date of any judgment for a deficiency. After 7 years the information must be removed from a credit report as "obsolete".
Four, if your mortgage was FHA-insured or VA-insured, the VA or FHA may attempt to collect any deficiency resulting from a foreclosure sale by referring the debt to the IRS for collection by intercepting future tax refunds or other funds due you by the federal government.
XII. Do I have any additional Rights if I bought my home from the Farmers Rural Housing Service?
Yes, you have important rights and remedies that may help you save your home. Depending on your circumstances, you may qualify for a moratorium on your payments or additional interest credit. With a moratorium, your payments can be stopped for up to two years. If you qualify for additional interest credit, your payments will be reduced. You should first talk to your county supervisor about a moratorium or additional interest credit.
B. FORECLOSURE UNDER CONTRACT FOR DEED
I. Contract for Deed is an instrument used to purchase and sell real estate. It is a contract in which the buyer pays for a piece of land by making monthly payments for a period of years. Upon paying off the full price, the Buyer receives a warranty deed and title to the property. Until the contract is paid in full the buyer has no ownership rights or title to the property.
II. What triggers the foreclosure in a Contract for Deed?
Failure to make even one payment or failure to comply with a term of the contract in the contract for deed can trigger the default provisions of the contract for deed.
III. What must Seller do to foreclose on my home?
The Seller must send a very specific type of notice of default to the buyer. The notice must be in 1) writing, 2) delivered by registered or certified mail, return receipt requested. The notice must be conspicuous and printed in 14-point bold face type or 14-point uppercase type written letters, and must include on a separate page the statement:
YOU ARE NOT COMPLING WITH THE TERMS OF THE CONTRACT TO BUY YOUR PROPERTY. UNLESS YOU TAKE THE ACTION SPECIFIED IN THIS NOTICE BY (DATE) THE SELLER HAS THE RIGHT TO TAKE POSSESSION OF YOUR PROPERTY.
NOTICE
(a) The notice must
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also:
(1) Identify and explain the remedy the seller intends to enforce;
(2) If the purchaser has failed to make at timely payment, specify:
(A) the delinquent amount, itemized into principal and interest;
(B) any additional charges claimed, such as late charges or attorney's fees; and
(C) the period to which the delinquency and additional charges relate and
(3) If the purchaser has failed to comply with a term of the contract, identify the term violated and the action required to cure the violation.
(b) Notice by mail is given when it is mailed to the purchaser's residence or place of business.
IV. What happens if I cannot get current on my payments or cure the default?
The Seller can cancel your contract if you have paid less than 40% of the amount due or made less than 48 payments on the contract. The Seller must send notice and notify the Buyer of his intent to enforce the cancellation remedy and the Buyer has 30 days to cure the default. If the buyer fails to cure the default, the Seller can cancel the contract and take possession of the property. This is usually done through an eviction procedure if the contract allows for tenancy at sufferance upon default and failure to cure.
V. What if I have paid 40% or more of the amount due or I have made more than 48 payments?
If you default after you have paid more than 40% of the amount due or you have made more than 48 payments, the Seller must send notice to the Buyer giving the Buyer 60 days after date notice is given to cure the default. If you cannot cure the default, the Seller is granted the power to sell through a trustee, the Buyer's interest in the property. The Seller must post, file, and serve notice of sale as prescribed for a foreclosure under a Deed of Trust.
C. HOME EQUITY LOAN FORECLOSURE
What will happen if my mortgage company decides to foreclose on my home equity loan?
(1) Your mortgage company must first serve you with written notice of your default by certified mail. The notice must inform you of your default and give you at least twenty days to cure the default. If you fail to cure the default within the twenty-day period, the mortgage company may file either a lawsuit seeking judicial foreclosure or an application to the court for an order allowing a foreclosure.
(2) If your mortgage company were to file an application with the court for an order allowing a foreclosure, they would send that application to you via certified and first class mail. You are then required to file a response with the court on or before 10:00AM on the first Monday after the expiration of 38 days after the date of the mailing of the application and notice to you. You can include in your response a general denial or as many matters in your mortgage company's foreclosure order application that you want to contest. You should file your response, which should state your mailing address, with the clerk of the court, and also send a copy of your response to your mortgage company.
(3) If you do not respond to the application for a foreclosure order by the deadline, the court will grant the mortgage company's application to sell your house in a foreclosure sale. If you file a response, the court will set a hearing to determine whether or not to grant the application for an order allowing a foreclosure. At that hearing, the court will grant the application if it determines that you have the debt, the debt is a home equity loan, you are in default, and you were given the required notice to cure the default and accelerate the debt.
(4) If the court grants the application for a foreclosure, the mortgage company will then give you a 21-day notice of the sale of the property by sending to you, via certified mail, a written notice of the sale, including a statement of the earliest time at which the sale will begin.
Texas does not give you any right to redeem the property after a foreclosure sale except if property is sold by a taxing entity for nonpayment of taxes. The purchaser at the sale is under no obligation to sell back the property after the foreclosure sale.
You do not have to move before the date of the foreclosure sale. If you are still in the property after the foreclosure sale, the buyer at the foreclosure sale cannot simply set you out. The buyer must first give you a three-day notice to vacate the premises. If you do not vacate within the time period given to you by the buyer, the buyer may file an eviction lawsuit with the justice of the peace court. You will receive a copy of the eviction papers from the constable. Those papers will tell you what you must do to request a hearing.
So, what are your choices in the event that you face foreclosure?
One, if you wish to keep your home, you should first attempt to work out a reinstatement agreement with the mortgage company. You should do this as soon as you fall behind on your payments and not wait until you are many months delinquent. Many mortgage companies will enter into reinstatement agreements on terms that allow the buyer to resume future monthly payments and pay the delinquency over a period of months.
Two, you can file a Chapter 13 bankruptcy before the sale and keep your home, provided you have sufficient monthly income to make future monthly payments as they come due and also pay some additional amount each month on the delinquent balance. You should resort to a Chapter 13 bankruptcy only if you have attempted to work out a reinstatement agreement with the mortgage company and it has been unwilling to accept an agreement that you can keep. With a Chapter 13 bankruptcy, you will propose a plan to the court under which you will pay the full delinquent balance in a period not to exceed five years. Whether a Chapter 13 bankruptcy is possible will also depend on what other debts you may have.
Three, you can sell your home, provided you can do so before a foreclosure sale. This will require that you examine the deed of trust to see whether it requires the permission of the mortgage company to approve any sale or the credit of the buyer. If you have considerable equity in your home and have decided that you will be unable to make future monthly payments, you should seriously consider selling to realize at least some equity. If you decide to sell, you should work with a realtor who can advise you about the value of your home and the price needed for a quick sale.
DISCLAIMER
The above examples are provided for illustration purposes only. Any resemblance to a particular business, lender, or company is strickly coincidental and unintentional.