Foreclosure FAQs

What is Foreclosure?

Foreclosure is what occurs when real estate (property) gets repossessed by a bank/lender that provided a loan to pay for the property for which the borrower is no longer able to make payments on the loan.   To foreclose on real estate, the bank must prove that the borrower has broken the terms of their loan agreement.  Completion of the process is foreclosure upon the property.

I don’t have a mortgage I have a Deed of Trust can I be foreclosed on?

Yes both can be foreclosed on but the process is different.
Mortgage: mortgages use a judicial foreclosure sale where the real estate is sold under the courts supervision and the proceeds first pay off the outstanding property taxes owed and then the mortgage. The balance will pay off other lien holders, and the amount left over would go to the property owner (former property owner).
Deed of Trust: or power of sale, allows the bank/lender (Beneficiary) to foreclose on the real estate without any court involvement.  This is a much easier method of foreclosure than by a judicial process. Arizona uses this type of foreclosure primarily.

Have others been faced with foreclosure?

Yes, the number of loans that have already been lost to foreclosure is reported to be approximately 1.5 million homes.

Will a foreclosure hurt my credit?

According to Fair Isaac A foreclosure may harm your credit by up to 200 pts. Of course every person’s situation is different and there is no way to estimate the actual impact a foreclosure will have on your credit.

Will I be able to buy a home again after a foreclosure?

Typically a foreclosure can prevent home ownership when you need to borrow to purchase for 7 years. New GSE guidelines will affect all home borrowing optoions. This does not mean that you will not be able to own a home again, as every person’s situation is different and there is no way to estimate the actual affect a foreclosure will have on your ability to buy in the future.

What is HAFA? (Home Affordable Foreclosure Alternatives)
Initially announced on May 14, 2009, with guidance and standard forms issued on November 30, 2009, the program will help owners (referred to below as borrowers) who are unable to retain their home
under the Home Affordable Modification Program (HAMP).
A borrower (the current owner) may be able to avoid a foreclosure by completing a short sale or a deed- in-lieu of foreclosure (DIL) under HAFA. The guidance and forms released on November 30 do not apply to loans owned or guaranteed by Fannie Mae or Freddie Mac.  Those enterprises will issue their own HAFA guidance and forms.

Who is eligible?
The borrower must meet the basic eligibility criteria for HAMP:
- Principal residence.
- First lien originated before 2009.
- Mortgage delinquent or default is reasonably foreseeable.
- Unpaid principal balance no more than $729,750  (higher limits for 2 to 4 unit dwellings).
- Borrower’s total monthly payment exceeds 31% of gross income.

How will HAFA improve the short sales process?
- Complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home. Uses borrower financial and hardship information already collected in connection with consideration of a loan modification under HAMP.
- Allows borrowers to receive pre-approved short sales terms before listing the property (including
the minimum acceptable net proceeds).
- Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
- Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
- Uses standard processes, documents, and timeframes/deadlines.
- Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 match for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for-
three matching basis; up to 3% of the unpaid principal balance of each subordinate loan).

What about DIL?
Subject to investor requirements, servicers may accept a deed-in-lieu of foreclosure under HAFA, which requires a full release from debt and waiver of all claims against the borrower. The borrower must vacate the property by a specified date, leave the property in broom clean condition, and deliver clear, marketable title. Same incentives available.

What else should I know?
The deal must be “arms length.”  Borrowers can’t list the property or sell it to a relative or anyone else with whom they have a close personal or business relationship. The amount of debt forgiven might be treated as income for tax purposes.  Under a law expiring at the end of 2012, however, the tax may not apply.  Forgiven debt will not be taxed if the amount of forgiven debt does not exceed the debt that was used to acquire, construct, or rehabilitate a principal residence. Check with a tax advisor.
The servicer will report to the credit reporting agencies that the mortgage was settled for less than full payment.  There will be a negative effect on credit scores. Buyers may not reconvey the property within 90 days after closing.