Contracts for deed are typically used when the seller is financing the purchase.
The buyer takes possession of the property but does not receive the title until he has paid the seller in full. Although a bank has only one way to regain pos- session of a property when the borrower defaults on the loan, the seller in a contract for deed has two options:
Foreclosure, as discussed earlier
Forfeiture(automatically relinquishing rights to a property by not fulfill- ing the requirements stipulated in the contract)
A contract for deed can only be forfeited if the contract expressly allows for forfeiture. If the contract is silent on forfeiture, foreclosure may be the only option. Check the contract for a forfeiture remedy clause and consult your attorney to find out about state statutes that govern land sale contracts and forfeiture in your area — just because the contract contains a forfeiture clause doesn’t mean your state allows it.
If someone is filing a complaint against you in a county other than the one in which your home is located, you may file a motion for a change of venue in order to bring the case into your district court. In some cases, you may even be awarded court costs and attorney fees if the other party contests the change of venue.
Before the other party can file a complaint, he must serve you with a notice of forfeiture.The notice should state the names of the parties, the legal descrip- tion of the property, the past-due amount, when payments were due, the date the contract was signed, and any other information deemed a material breach of the contract. You may be able to challenge the claim if any one of these points is inaccurate.
The bad news (for you) about contract for deed forfeitures is that if you remain in possession of the property after forfeiting it, you may have to pay additional damages, including rent. Some courts may even allow the addition of payments that become due during the redemption period. So if you’re thinking of staying put as long as possible, that may not save you a whole lot of money.
In most cases, you have a set number of days to cure the default, typically 15 days, but check your contract to see if it gives you more time. If you don’t cure the default in the specified number of days, you can expect to be sum- moned to court to stand trial. The summons will require you to bring proof of why the eviction should not proceed. Your best options at this point are as follows:
Present a great reason why you shouldn’t be evicted.If you can prove on paper that you did honor the contract or that the seller breached the contract, you may have a chance. If you fail to raise a defense, the plain- tiff’s attorney will request a summary judgment, and then you’re pretty much at the mercy of the courts.
Consider claiming “lack of time to file an answer,” and request an extension to do so.
Demand a jury trial.This is often the best tactic, if you’re looking to buy yourself some time. If the courts are backed up and you won’t be able to have a jury trial for some time, the plaintiff may be more willing to settle the issue with you and avoid all the hassle and cost of a jury trial.
Make sure you show up to court. Failure to file an answer or to show up for the initial hearing may result in a default judgment against you. That essen- tially means you no longer have a case unless you can successfully appeal, which is unlikely.
After the plaintiff wins a judgment and that judgment has been sent to the parties, the plaintiff may file the judgment and seek eviction if you fail to initiate a post-judgment motion or challenge, usually within ten days.
If your state has a redemption period, the clock starts ticking from the time the judgment is issued granting eviction. The redemption period is usually tied to how much of the purchase price you’ve paid; for example, if you’ve paid less than 50 percent, you get 90 days, and if you paid over 50 percent, you get 6 months. If you’re able to redeem the property(pay the full amount due on the judgment), you get to stay and you’ve solved this forfeiture prob- lem. If you don’t redeem, the plaintiff will apply for, and the court will grant, an order of eviction or a writ of restitution, and the court officer will execute the eviction and restore possession to the plaintiff.
Stepping Through the Foreclosure Process
Although mistakes, delays, and other unexpected occurrences are common, the steps leading up to the loss of a property in foreclosure are fairly pre- dictable. Knowing the sequence of events is important, so you can anticipate key events and have a better understanding of your options at each point in the process.
The following sections describe each stage in the process and highlight important information that applies to each stage.
Receiving nasty letters in pre-foreclosure
When you miss a mortgage payment by more than a few days, the bank begins sending you notices that request immediate payment. The later the payments, the nastier the notices become. These notices are no different from notices you may receive for missing a credit card payment, except, in this case, the bank has the power to foreclose if you don’t catch up on your payments.
Typically, the bank sends you a few missed payment notices before it declares an all-out default, but this grace period depends on your bank. Some banks are more aggressive and won’t let you get several months behind on pay- ments before declaring default, while others may be more willing to work with you.
The earlier you contact the bank, the more options you have. Don’t simply ignore missed payment notices. When your bank is calling you, you’re playing defense. When you’re calling your bank, you’re playing offense. And playing good offense is often the best defense. Do the hardest thing first — call your lender.
Receiving a foreclosure notice — Ouch!
As soon as the bank determines that you’re not going to make good on the back payments, it declares you in default and exercises the acceleration clause in the mortgage to declare the full amount due. When this happens, you’ll receive the notice of default (or foreclosure notice). In a foreclosure by advertisement state, the notice is also published in a local newspaper; in a judicial foreclosure state, a court officer may serve you with a complaint.
At this point, your bank may or may not be willing to work out a solution with you, but regardless of how cooperative it is, you need to contact the bank and find out about your options. (We offer more about how to talk to your bank in Chapter 11.)
The notice of foreclosure puts you one step closer to losing your home, and if it hasn’t set in yet, realize now that this problem is serious. Don’t despair, but if you were daydreaming before, thinking this would work itself out, this is your wakeup call.
Aborting or delaying foreclosure
During the missed payment stage, you can completely avoid foreclosure by catching up on missed payments. After the bank officially starts foreclosure proceedings, however, stopping foreclosure becomes more challenging.
In the following sections, we explain the three primary methods for stopping foreclosure between the time you receive the notice of default and the time of sale.
Reinstating your mortgage with a promise of payment
Your bank doesn’t really want your house; it wants you to make your monthly mortgage payments, so it can collect interest on your loan for 30 years or however many years you still owe on your home. Foreclosure costs the bank time and money — and banks aren’t in the real estate business, they’re in the money-lending business.
For this reason, banks are often willing to forgive and forget by allowing you to reinstate your mortgage.Reinstatement consists of paying the total amount of missed payments plus interest. If you missed two payments of $1,200 each, you can expect to need roughly $2,500 to reinstate (to cover missed payments, penalties, late fees, and possibly even legal fees); plus, you’ll still have to make that next monthly payment on time.
Reinstatement is almost always the best and cheapest way to solve the prob- lem and prevent the foreclosure. In Chapters 4 and 11 of this book, we sug- gest that if you get behind but can borrow the money from family or friends to reinstate, and can then keep up with your payments, you should do so.
If you had a great interest rate and the rates have gone up dramatically, the bank may not be so willing to allow you to reinstate. It may want to raise your interest rate and modify the mortgage. Read your mortgage agreement care- fully. It may give you the right to cure the delinquency, regardless of whether your bank is willing to allow you to reinstate.
Playing catch-up with a forbearance agreement
A forbearance agreementis essentially a new payment plan that enables you to catch up on missed payments over time, in addition to making your regu- larly scheduled payments. If you experienced a temporary financial setback but now have a sufficient amount of money coming in, forbearance may be a realistic option.
Your bank is likely to require more in-depth information to enter into a for- bearance agreement than it requires to reinstate the mortgage. The bank wants to make sure you can pay, so it’ll require bank statements, pay stubs, and a host of other information from you to prove it. In a way, this is a good thing for you — you don’t want to enter into a forbearance agreement that places you in a terrible financial situation in the future.
If the bank offers forbearance as a solution, you may have little say in how the payments are structured. Simply provide the bank with the information it requests and be honest about how much you can afford to pay each month.
Try to negotiate for a realistic payment plan. Keep in mind that your monthly payments are going to increase, perhaps dramatically. If you can afford it and saving the house is worth the sacrifice to you, this may be a good option. If, however, forbearance is just going to put you in the same situation a couple months down the road, other options may be better. (To find out more about your options, check out Chapter 5.)
If you know that you probably won’t be able to catch up on missed payments in forbearance, don’t dismiss the option entirely. Forbearance may buy you some extra time to explore other options. Just the time spent negotiating the forbearance gives you extra time. Keep in mind, however, that the bank is most likely going to keep the wheels of foreclosure moving forward and prob- ably won’t stop them until all its conditions are met, some money is sent to the bank, and a forbearance agreement is firmly in place. (For more about negotiating a forbearance agreement with your lender in pre-foreclosure, check out Chapter 8.)
Stalling foreclosure in court
If you can’t stop the foreclosure in time to come up with a reasonable solution, you may be able to slow the process in court. Your best option is to hire a good attorney. You may be thinking, “But if I had the money for an attorney, I wouldn’t be inthis mess.” Remember, however, that an attorney may end up costing you less money than you stand to lose if your home ends up on the auction block. Do the math before dismissing the notion of hiring an attorney.
Not all attorneys have the same training and expertise. You don’t want a divorce lawyer representing you in a foreclosure case. Hire an attorney who is trained and has plenty of experience representing homeowners who are facing foreclosure. State and federal consumer protection laws allow for some very technical defenses, but only a handful of lawyers in your area may be well-versed on these complicated statutes. Make sure you hire a specialist.
If you can’t afford an attorney, you may be able to handle some court actions yourself, but keep in mind that you’ll be going up against the bank’s attorney, who probably knows a little more about foreclosure laws than you do. Turn over some rocks — you may have legal services available to you through your workplace or union, or you may have access to legal aid through state, county, or community organizations.
If you decide to take on the case yourself, read up on your state’s foreclosure statutes and read materials that explain those statutes. Pay close attention to the details of actions that the bank must take to foreclose properly. If the law requires that the bank publish the notice for five weeks, but you can prove that it only published for two weeks, you may be able to challenge the fore- closure. For additional tips, visit the National Consumer Law Center’s Web site at www.consumerlaw.org.
If you find yourself in court, here are some actions you can take to buy your- self some extra time and perhaps give yourself more bargaining power:
Attend all hearing dates.If you’re required to bring proof of payments or other information, bring it with you. Don’t miss the hearing and allow a default judgment to be entered against you.
Demand the right for a jury trial or more time to file an answer (in judicial foreclosures).This may buy you another day in court; if the court docket is severely backed up, it may buy you weeks. If nothing else, it may give you some negotiating power with the bank to help you settle. (A jury trial may not be an option in all jurisdictions.)
File a judicial action to a foreclosure by advertisement before the sale.
This may suspend the sale and force an adjournment.
File an action to challenge the foreclosure process after the sale.This may invalidate the whole process and force the bank to start all over again. (If you know the bank erred in something that will cause the sale to be voided, contact an attorney. She may advise you to wait until later in the redemption period to challenge the sale.) This could force the bank to start all over again. Consult an attorney so you don’t miss some- thing important that could cost you everything.
During the redemption period (in judicial foreclosure or forfeiture), file an appeal or motion for a new trial.This may suspend the redemp- tion period and prevent the judge from issuing the writ of restitution.
Foreclosures by advertisement are subject to procedural challenges, so consider filing a challenge to the process.You may lose if the bank followed proper procedure, but this may still give you a little more time.
Know the law and the rules of foreclosure where you live, exercise your rights, and challenge the bank when it doesn’t follow the rules.
Filing for bankruptcy
Filing for bankruptcy may not be the perfect solution that many homeowners think it is. It can be costly, fail to solve the underlying problem, damage your credit, and fall short of saving your home anyway. However, we do recom- mend that you consult with a qualified bankruptcy attorney or at least read Personal Bankruptcy Laws For Dummies,2nd Edition, by James P. Caher and John M. Caher (Wiley), to find out about your options before ruling out bank- ruptcy entirely. A good bankruptcy attorney may be able to fashion a plan with high odds of your being able to keep your house.
By filing for bankruptcy, you create an automatic staythat prevents creditors from attempting to collect on their loans. If you file before the sheriff’s sale, your house can’t be sold at auction.
Consult a bankruptcy attorney, preferably one who focuses on debtor repre- sentation, ask about costs, and find out the pros and cons of filing for bank- ruptcy. Most bankruptcy attorneys can review your situation and inform you of your options for $200 to $300. A few disreputable bankruptcy attorneys are what we call mills— they collect the filing fee and their fee, and then you may see the attorney only once when he firsts meets you and briefly goes through the benefits of filing. He doesn’t take time to understand your situa- tion, nor does he present the court with a plan that you can actually meet.
Bankruptcy can be costly, so don’t take it lightly. Enter it only with full under- standing, commitment, and representation. For more about the bankruptcy option, check out Chapter 12.
Having your home sold out from under you
If you’re living in a state that has no redemption period, the sheriff’s sale is the beginning of the end of losing your home. As soon as a winning bid is accepted at the foreclosure auction, that winning bidder receives the sheriff’s deed and can proceed to have you evicted if you don’t move out willingly.
If you’re living in an area with a redemption period, you can remain in your home and explore other options for retaining possession of the property, as explained in the following section.
Never assume that the sale is the end of the line. Contact your attorney to find out about any remaining options. If you can’t afford an attorney, visit your county’s register of deeds office and ask about your options.
In our area, where we have a 6- to 12-month redemption period, some unsavory characters visit distressed homeowners and tell them that they attended the sheriff’s sale, they purchased the property, and the homeowners have to pack and leave immediately. These guys know that the homeowners have a
redemption period, but they don’t care — they rely on ignorance and fear.
The best defense against these hooligans is to know your rights, verify everything someone tells you, and remain calm.
Seeking redemption: Buying back your home
At any time during the redemption period (assuming you’re living in an area with a redemption period), you can “buy back” your home by paying the person who bought it at the sale the full amount that that person paid, along with interest (as stipulated in the mortgage or contract for deed) and any property taxes and insurance that the person paid and has the legal right to collect. In some cases, this means paying thousands of dollars more than the amount the buyer paid at auction.
During the redemption period, you have several options to retain possession of your home or sell it yourself:
Refinance with a new mortgage.
Borrow money from family and friends. (Note:This is easier to do before it goes to sale.)
List your house for sale with an agent.
Sell your house to an investor.
Sell to an investor and then buy the house back on a contract for deed or via a lease-option agreement.
Win the lottery and pay the house off in cash. (We haven’t seen it happen yet.)
In some states, even though you have no right to redeem the property after the sale, you may be able to cure the defaultby paying all past due amounts several days prior to the sale.
We cover these options in greater detail in Chapter 5 and throughout this book.
The key is to do something to help yourself out of this mess. Better yet, do everything— put the house up for sale, contact an attorney, meet with a loan officer to find out about refinancing options, and meet with a private real estate investor. Knowing all your options empowers you to pick the best one or two or three.