What happens when I can’t pay my mortgage? Can I just give the house back to the bank? Will my house go through a mesa foreclosures? What is that?
First, a few disclaimers: I am not an attorney, and you should consult one before taking any action. Second, this information, while generally applicable to many states using Deeds of Trust rather than mortgages, is specific to the state of Arizona.
Second, there is a substantial amount of background information which will be helpful – you don’t need to be an expert, but an understanding of the process will help you to see why things happen in the way they do, and what options you might have.
The Process
When you bought your home, chances are you signed a promissory note. This is a legal instrument in which you promise to repay the loan to the bank, under certain terms and conditions. You also likely signed a deed of trust, which effectively pledged your home as collateral for the loan.
What does this really mean? It means that someone, the trustee for the deed of trust, has the legal authority to sell your home, with you in it , if the lender tells them to do so. It is a complex legal arrangement, and in effect gives the bank a way, without going to court, to sell your home if you don’t make your loan payments.
In Arizona, there are often two loans on properties; many of us bought homes with no money down, and this was accomplished using an 80% first loan and a 20% second loan. Sometimes we bought with some money down, and later added a second loan. And, we are obligated to make payments on both loans, if both exist.
When you can’t make your payments, the first thing to happen is a hit on your credit (along with some love letters from the bank). Eventually, a Notice of Default will be delivered and recorded at the county recorders office, and the bank will instruct the trustee to sell your property thru a mesa foreclosures. At this point the trustee schedules a sale, and your home is scheduled to be auctioned off at a foreclosure sale.
Ultimately, if nothing changes, your house will either be sold at the auction, or no one will bid and your house will revert to the bank as an REO property (Real Estate Owned). Banks generally do not enjoy owning property, so they are open to other suggestions regarding disposition of a non-performing loan (one in which payments are not being made).
Liens
When you first bought your home, the Deed of Trust, the first note, was recorded against your property, and was likely in “first position”. A second note would be in second position. When the first lien forecloses, any subsequent liens are removed, so the first lien holder can obtain clear title to the property. [Second lien holders often bid at auction, but they must bid at least the amount the first lien holder is asking]
In Arizona, property taxes are assessed the first of the year, and become a lien against the property in first position, moving any other liens down in priority. The state must be paid first.
If you had someone perform work on your home, such as remodeling, and they are not paid, they can also record what is called a mechanic’s lien against your property, however this lien will be next in position time-wise according to the date work started. This is almost always after the first and second liens, and after any property tax lien. Further, other unpaid creditors may (through legal process) place liens against a property.
Recourse
There is much talk about recourse. In Arizona, a loan taken out to buy a home, or “purchase money” loans, are non-recourse. This means that once a foreclosure has occurred, the lender has no recourse to get any extra money that was left over after foreclosure. For example, suppose you owe $200,000 on your loan, and your home sells at a foreclosure auction for $150,000. The lender cannot come after you for the additional $50,000.
However, if you have refinanced, or if you have taken more money out of your home through a second loan or a home equity line of credit, (or if your home is on more than 2.5 acres) then this is no longer “purchase money”, and the lender has recourse – they can later take action to try and collect the remaining funds from you.
Credit
The very worst thing you can have on your credit history is not a bankruptcy; it is a foreclosure. It is still possible, after a few years, to get a loan if you have had a bankruptcy. If you have been through a foreclosure, however, it is very, very difficult to get a loan for at least 5 years. This is where a short sale becomes a good option.
Short Sales
A short sale is a process by which, through obtaining a fair market value offer, and through lender negotiations, your home can be sold for substantially less than the amount owed. The impact on your credit is far, far less than a bankruptcy or foreclosure; in some cases you may qualify for an FHA loan in as little as two years, and for other loan programs even sooner.
A good short sale negotiator will do their best, in the case of recourse loans, to obtain “full settlement language”. This language is some legalese which specifically and clearly releases you of any further liability for the loan. Sometimes this requires you to make a monetary contribution, and sometimes you might have to sign a promissory note for a second lender. Typical deals involve the first lien being satisfied and giving full settlement language, especially in the case of purchase money, and the second lien will sometimes accept as little as $0.10 per dollar of loan amount. So a second loan of $50,000 might be settled for a contribution of $5,000, or for a promissory note of that amount.
Timing
Once a trustee’s sale has been scheduled, it is 90 days before the sale occurs. If you find a buyer for your home, then sometimes the sale can be postponed while the sale negotiation takes place. A typical short sale negotiation with a lender takes 60-90 days; if they run long, the lender may postpone the sale so the negotiations can be completed. Further, this means you may be able to stay in your home effectively rent-free during this period. Some lenders, because they do not wish to own property as REO, are not starting foreclosure since they prefer to have someone live in a property and maintain it rather than have it vacant and possibly vandalized and have the pool turn green, weeds take over the yard, etc.
What Can I Do?
If you are late on your loan payments and do not expect to be able to catch them up, or if you have already gotten a Notice of Default or Notice of Sale, contact a Realtor experienced in short sales and mesa foreclosures.