My nieighbors were a nice but struggling family. They wanted to sell their house and move to another state. After a couple of months on the market they fell behind and nearly lost the house to forclosure. Somehow they managed to move (they borrowed money from family), saying they had a renter coming. The renter never came.
Yesterday, I saw some guys messing around the house, and being a nosy neighbor, I asked them what they were doing. They said they were winterizing the house and changing the locks for the mortgage company.
I called the mortgage company to ask about the house. I’d like to fix it up and sell it myself if it is cheap enough. I called the MC, got transferred alot and finally wound up in the Loss Mitigation department. The LM dept said the house was current and wouldn’t give me any more information. Everyone else had seemed to confirm that the house was going into forclosure. Someone along the way said it was going for auction.
What is the best way for me to find out what is happening with house? What happens when a house goes this way?
Foreclosures is a generic term. There are at least three separate ways that a mortgage holder can deal with a defaulting borrower.
Judicial foreclosure. If they go this way, they sue the borrower, and add to the lawsuit any other parties claiming an interest in the property. The parties wrangle and fuss, and eventually the court orders the property sold.
The sheriff sells the property at a public auction after advertising the auction for a statutorily-established period of time.
After the sale, the proceeds are applied to the borrower’s debt. The difference between the proceeds and the outstanding debt, assuming the sale yields less than the debt, is then entered in a “deficiency judgment.”
Non-Judicial foreclosure. This is similar to a judicial foreclosure except that the mortgage holder does not sue the borrower before the sale. The mortgage holder instead gives written notice to the borrower and publishes a notice in the legal section of the paper.
A deed-in-lieu of foreclosure. Here the mortgage holder approaches the borrower and the borrower agrees to deed the property back to the mortgage holder and save everyone some time and expense.
Ok. So how can you find out?
The mortgage company won’t discuss your neighbor’s finances with you. They will get in big trouble if they do. Indeed, they probably broke some laws by telling you the loan was current. And I doubt that it really was. This phone call was premature.
Step one. Call the local courthouse. The lawsuit is public record. If a judicial foreclosure has been started, you will find a record under your neighbor’s name. If you find one, go look at the file to see what is going on.
Check your local paper of record. Some papers can be searched online. For others you may have to contact someone in their archives. If they won’t help. You will have to scan the paper for publications regarding the property.
Call your local sheriff. The sheriff will have records of any scheduled or past auctions of the property.
From what you have described, it sounds like the property has already been foreclosed upon. But it is hard to know until you check.
Buying foreclosure properties is not for the uninitiated. There are some technicalities that you need to know about, and they vary between jurisdictions. It would be a good idea to consult a local attorney or at least read a book on the topic before you dive in.
Gfactor, what happens in a scenario where there is equity remaining after the auction sale and all creditors are satisfied? A friend of mine recently lost his house in foreclosure but I distinctly recall him saying that that he would receive any leftover cash in the sale. I was under the impression that the lender was the recipient of any profit since they assumed possession of the property from the borrower. I believe the “non-judicial foreclosure” scenario best describes his situation, as I did not see anything in our (very) public county records system to support the other two scenarios you described. Is he just trying to put a positive spin on a dreadful situation? I suspect he walked away from $30k in equity in his home.
The lender has a “security interest,” in this case a mortgage, in the property in order to secure a specific debt. Put another way, the property is collateral for a loan. Sometimes the loan could be very small, sometimes it is big. After a foreclosure, the property is sold to pay off the loan, but the lender’s interest in the property is limited at all times to the amount of the loan. So if the property sells for more than the amount owed, the borrower gets the difference. Sometimes, the borrower can get another loan to pay off the mortgage, even in foreclosure, especially if the amount of the borrower’s equity is high.
An example may help. Suppose that you had paid off your home, valued at $140,000. Then you remodeled your kitchen, using a home equity loan. You borrowed $20,000 (a nice kitchen) and gave the lender a mortgage. Your equity is $120,000. Then you lost your job and had no way to pay the mortgage. The lender foreclosed. The house might sell for $50,000 instead of $140,00. Indeed the lender would probably bid $20,000 (the amount of the loan) at the auction, and foreclosure properties often sell at less than fair market value. Anyway, you would get $30,000 from the sale. And I think you can see why.
It is actually a little more complicated because the amount of the debt would be increased by interest, late fees, attorneys’ fees, and court costs. But that is the way it works.
Did your friend actually get any money from his deal? Well, I’m not gonna tell you a fairy tale. He said he would get any leftover cash. That is his right. But I bet by the time the auction was over, and everyone and their lawyer got paid, there was no money left for him. I have seen cases where the defaulting party walks away with a check, but they are pretty rare. Sorry.
I suspect my friend got little or nothing from the auction sale, even though he told me otherwise. I do know that his house sold for below FMV, but not grossly so. What I don’t know is how much in arrears he was with the lender beforehand or what other costs were involved with the foreclosure. Hopefully, he really did get something out of it, but his current situation seems to indicate otherwise.