Understanding Your Redemption Rights in Foreclosure: A Guide to Protecting Your Property

Understanding Your Redemption Rights in Foreclosure: A Guide to Protecting Your Property

When you signed a mortgage to fund the purchase of your home, you signed a contract with a lender. The lender provided the money you needed to purchase the home, and you agreed to certain terms to repay that money to them.

If you stop making these mortgage payments in any way, the lender has a right to use the foreclosure process so they can sell your home and use the proceeds they receive to not only repay the loan, but also recoup any associated costs and fees they incurred in the process.

Every state sets the rules and regulations for how the foreclosure process works, and at times, it can vary significantly. That being said, the process typically requires the lender to send a default notice first, after which there’s a reinstatement period and, finally, a foreclosure sale.  However, even after the foreclosure is completed most states offer a redemption period allowing the homeowner to pay to the mortgage lender in cash the entire amount received at foreclosure.  

Not every state provides homeowners with redemption rights in foreclosure, but in those that do, it’s important to know what your rights are.

Understanding Redemption Rights

So, what are redemption rights in foreclosure? Simply speaking, the right of redemption allows a property owner to repurchase their property after a lender conducts the foreclosure process.

In most states that provide redemption rights, this can only be done during a specific period of the foreclosure process, which is known as the redemption period.

In Michigan, for instance, the redemption period starts on the day of the actual sheriff’s sale and, in most cases, lasts six months beyond that time. State law also says that in order to redeem the home, the borrower has to pay the amount of the winning bid at the sheriff sale, plus any interest and fees.

In general, the right of redemption is put in place to ensure that a fair price is paid at the foreclosure sale, while also giving borrowers a chance to take back ownership of the property if they’re able to.

 

The Redemption Period

Each state has different rules and regulations for redemption rights, including what the redemption period is. In most states, the redemption period typically covers a specific amount of time after the foreclosure sale is held — as in Michigan, the state allows generally a 6 month redemption and in some cases 12 months.  However, this does not apply to property tax foreclosures conducted by the County as those tax foreclosures are only entitled to a 30 day redemption.

During the redemption period, a borrower can exercise their right of redemption by paying whatever the redemption amount is, as set by the state. Again, this is generally the amount that’s owed on the mortgage plus any incurred fees and costs.

Exercising Your Right of Redemption

If your property has been foreclosed on and has been sold at a sheriff sale, it’s still possible that you can take back ownership of the property. If you want to redeem your property after the foreclosure sale, you’ll need to provide written notice of your intention to redeem the property to the court, the buyer of the home — i.e., the high bidder at the auction — or some other party.

Your state laws will specify who this notice must be sent to, and what must be included in it. They will also specify to whom the money must be paid to. In some states, it’s the court or the buyer, while in other states, it’s another party who is handling the case. In the state of Michigan, the purchaser at foreclosure is required to file within 21 days of the foreclosure a Purchaser’s Affidavit, detailing the purchase price, the daily interest rate charge, the last day to redeem the property and their contact information to be able to reach them incase they want to redeem.

Limitations and Factors Affecting Redemption

The length of the redemption period varies from one state to the next. The shortest period of time is 30 days, while the longest period is one year.

Not every state provides a post-sale redemption period, and specific factors can change how long the redemption period lasts in some states.

In Michigan, for example, while most properties have a redemption period of six months, that gets extended to 12 months if the outstanding amount of the mortgage at the date of the foreclosure is less than two-thirds of the original principal amount. Farming properties might also qualify for a 12-month redemption period.

If your property has been foreclosed on and you are interested in redeeming it, you should consult with an experienced foreclosure attorney in your state to learn what redemption rights you have, if any.

Protecting Your Property and Rights

While it’s nice to have redemption rights in foreclosure — and it’s certainly something that you can and should take advantage of if you want to — there are other ways that you can potentially save your home if you are having trouble repaying your mortgage.

You can consider applying for financial help with your lender, with your state or both — if available — well in advance of the foreclosure sale. Many lenders will offer loss mitigation options such as loan modifications to borrowers who are struggling to make mortgage payments.

The reason they do this is because it is in their best interest to have you, the actual borrower, remain in the home and pay off the mortgage in full. This gives them the biggest return on their investment, and doesn’t force them to spend time and money to foreclose on your property.

Lenders are typically not in the business of being property owners. Most would typically much rather work with you on a loss mitigation plan rather than foreclose on your home and put it up for sheriff sale.

If you’re struggling to pay your mortgage, it’s important to investigate your financial assistance options, and apply for help, as early as you can in the process to avoid foreclosure and protect your property.

Conclusion and Key Takeaways

Some states provide redemption rights in foreclosure, which allow borrowers to retain ownership of their home even after it was sold at sheriff sale. This is a valuable right to have, as it gives you the power to avoid losing your home if you’re struggling to make payments.

Since redemption rights and periods vary so greatly from state to state, it’s crucial to understand your state’s rules and regulations. This allows you to protect your property throughout the foreclosure process.

By knowing all the details of the redemption period — including the process and limitations — can help you make informed decisions and potentially save your home. 

If you are having trouble making your mortgage payments, don’t hesitate to consult with a HUD-approved housing counselor or a foreclosure attorney to learn more about your options and rights.

In Michigan, Babi Legal Group has a combined 20 years of legal and real estate experience. We provide all of our clients with expert advice on all their needs related to foreclosures and bankruptcy.

To learn more, contact us today.

Understanding Deficiency Judgments in Foreclosure: What You Need to Know

Understanding Deficiency Judgments in Foreclosure: What You Need to Know

Foreclosure is the process by which mortgage lenders will attempt to reclaim their asset when a borrower doesn’t repay their home mortgage according to the terms of the agreement. When borrowers miss payments or get behind on payments, states have strict guidelines about what lenders can and must do in order to start the foreclosure process.

At the end of the foreclosure process, the lender will cause the auction sale to take place allowing a third party to purchase the property or take back control of the home and then sell it to recoup any losses they have incurred from the borrower not paying.

In some states, this is the end of the process. The lender takes the home, sells it and recoups whatever money it can at an auction sale. The borrower loses ownership of the home after their redemption period expires, and their credit is subsequently impacted.

Many states, though, allow for what’s called deficiency judgments. This provides a way for lenders to recoup any deficit that exists between what the home sold for at auction and what was owed on the mortgage.

Below, we describe in-depth what deficiency judgments are, how they work and what a borrower’s options are.

What is a Deficiency Judgment?

A deficiency judgment is an order from a court providing the lender with a money judgment that allows a lender to go after more money directly from a borrower. This can occur if, as mentioned above, the sales price of the home at auction was less than the remaining debt on the mortgage.

If a home has an outstanding debt of $200,000 but only sells for $150,000 at auction, the deficiency amount is $50,000. This is what the lender can seek to recover from the borrower through a deficiency judgment plus additional fees, costs and interest, which can accrue the longer the judgment is not satisfied.

Most commonly, deficiency judgments come after mortgage foreclosures complete. Not every state allows them, though.

Foreclosure Types and Deficiency Judgments

Just like all aspects of foreclosure, each individual state sets the rules and regulations for deficiency judgments.

Foreclosure Sale: Judicial vs. Nonjudicial Foreclosure

There are two main types of foreclosure — judicial and non-judicial. Judicial foreclosure involves the court system and will include an official court order, while a non-judicial foreclosure is a process that happens completely outside of the state court system.

In states where non-judicial foreclosures are allowed, a document within the mortgage paperwork essentially gives the lender the power to sell the home if a borrower defaults on the repayments. In states where judicial foreclosure is all that’s allowed, the court process will result in the lender receiving that right.

It’s important for both homeowners and lenders alike to understand the foreclosure process in their state. The laws that apply depend on where the home is located, and not where the lender is located.

Each state will outline the specific steps required for a foreclosure process to begin, what must be done by when, and whether a borrower has a right to redeem the property — even after it’s sold at auction.

In some states that allow deficiency judgments, lenders must file a lawsuit after the foreclosure to get a deficiency judgment. In most states that allow judicial foreclosures, the deficiency judgment will be part of the underlying foreclosure lawsuit — eliminating an extra step in the process.

Calculating Deficiency Judgments

In states where deficiency judgments are allowed, strict rules are in place to determine how much this judgment is worth — and how much a borrower might have to pay out of their pocket.

This is important in any economic environment, but especially in periods of a downturn in the real estate market. In the last major downturn that happened back in 2018, for example, home values plummeted, causing many homeowners to have a mortgage that was “underwater.”

How Deficiency Amounts are Calculated

The base of deficiency judgments is relatively easy to figure out. They are calculated by subtracting the foreclosure sale proceeds from the current principal balance on that mortgage.

So, if a borrower defaults on a $400,000 mortgage after making a substantial down payment at closing and paying the mortgage down for five years, you’ll need to first determine what the current outstanding balance is. This amount is called the outstanding principal.

In some cases, this amount could be rather close to the original mortgage amount in early years, since so much of a mortgage payment goes toward interest in the front-half of a mortgage. After five years, for instance, the principal balance on the above example could still be around $350,000 — depending on the down payment amount and how high the interest rate was.

If this home then sells for $325,000 at auction after foreclosure, the deficiency amount would be $25,000 — which is the difference between the auction sale price and the principal balance.

Some states also allow for lenders to pursue additional costs that are associated with the foreclosure process. 

Lenders Collecting Deficiency Judgments

Since deficiency judgments are court orders, they allow lenders to place liens on a borrower’s other property if they are successful. This could allow them to freeze a borrower’s bank accounts or to garnish their wages to collect on the outstanding debt.

Lenders that win deficiency judgments will collect this debt like all other unsecured forms of debt. Borrowers may not have to pay the full amount upfront, but rather could come up with a payment plan to satisfy this debt.

State Laws and Deficiency Judgments

Each individual state determines what type of foreclosure process is used and whether lenders are able to pursue deficiency judgments for any remaining debt.

States That Allow Deficiency Judgments

All but six states allow deficiency judgments. Only Washington, Oregon, Montana, Minnesota, California and Alaska forbid deficiency judgments in most instances.

There are some other states such as Arizona that have limits on deficiency judgments. In that state, for instance, deficiency judgments are not allowed for one- or two-family homes that sit on 2.5 acres or less.

Unfortunately, not only do deficiency judgment laws vary by state, but they can be very complicated, too. That’s why it’s important for borrowers to consult with an experienced foreclosure law firm in their state if they’re facing mortgage foreclosure and a possible deficiency judgment.

Deficiency Judgment Timeline

How long it takes for a deficiency judgment to put in place again depends on the state in which it occurs. Each state sets a defined process for what has to happen in order for a lender to file a deficiency judgment suit, and how long it takes to proceed through the court system.

Some states require lenders to act immediately after a foreclosure sale is completed, while others have a longer statute of limitation that allows lenders to wait several years to collect a deficiency judgment.

Borrower Options

Borrowers do possess some rights throughout the foreclosure process, including in regard to deficiency judgments. It’s possible that if you’re facing such a judgment, you could request that your lender waive their right to pursue a judgment after the home is sold.

It’s also possible that if a deficiency judgment is put in place, you could file a legal motion to overturn it. However, this process could be expensive and time-consuming, and require the help of an experienced lawyer.

If you’re hard-pressed financially, you may consider declaring bankruptcy, which could ultimately result in your debts, including any deficiency judgment against you, being discharged by a bankruptcy court.

Impact on Junior Liens

On most mortgages, senior lien holders hold the ultimate rights to secure their outstanding debt. If you have a second mortgage, home equity line of credit (HELOCS) and other junior loans, those lenders will likely lose their security interest in the real estate property once the senior lien holder forecloses.

The only way that those junior lien holders may receive payment from a foreclosure is if the foreclosure sale amount far exceeds the outstanding principal on the primary mortgage.

Conclusion

Deficiency judgments allow lenders to go after borrowers for any difference in the amount that exists between the outstanding principal on a mortgage and how much the home sells for after a foreclosure. These laws, like all foreclosure laws, differ greatly by state and are sometimes hard to understand.

That being said, it’s very important to understand the foreclosure process and deficiency judgment laws in your state so that you can protect yourself if you’re ever in trouble. Deficiency judgments laws can have a significant impact on not only your credit history but your personal finances as well.

Babi Legal Group is a Michigan-based law firm experienced in many areas of law, including debt collection and settlement, bankruptcy and real estate. If you’re facing foreclosure and/or a deficiency judgment, contact us to find out what your rights are and how we can help you.

Understanding Judicial vs Non Judicial Foreclosure: A Comprehensive Guide

Understanding Judicial vs Non Judicial Foreclosure: A Comprehensive Guide

When homeowners don’t repay their mortgage or property taxes in a timely fashion, lenders, municipalities and other creditors can seek to reclaim their asset through the foreclosure process. 

In order to reclaim their asset — in this case your home or an investment property— the creditor must follow strict guidelines that are set forth by the state in which the home is located. Once this happens, foreclosure sales and execution sales allow the creditor to recoup the money the borrower hasn’t paid.

There are two main types of foreclosures — judicial and non-judicial — and each state has rules about which one can and/or must be used.

Below is a guide to each type of foreclosure, including details about how the process works.

Judicial Foreclosure: Definition and Overview

Judicial foreclosure is a type of foreclosure that involves the court system. In judicial foreclosures, the lender will need to file an official lawsuit in state circuit court in the county the property is located to reclaim their asset.

This happens in many states where there isn’t a power of sale clause in mortgage documents, which would give the lender the legal authority to sell a property if the borrower defaults on the repayments.

Because of this fact, the foreclosure process can take many months, and sometimes even years, to complete. 

Each state will also determine whether there is an availability for borrowers to enter into foreclosure mediation with the lender, and whether there’s a right to cure/reinstate the mortgage once the process begins.

How Judicial Foreclosure Works

In states where judicial foreclosure is allowed or required, there are specific steps that lenders need to follow in order to follow through the process. 

Step-by-Step Explanation of the Judicial Foreclosure Process

The first step in the judicial foreclosure process is that the lender must send a letter to the borrower notifying of its intent to foreclose. This can only happen after the borrower is behind on payments for at least 120 days.

In most states, the debtor will have 30 days to make good on the delinquent payments. If they do not, then the lender must file a lawsuit in court. At the same time, they must issue the borrower a notice of the foreclosure lis pendens by issuing them a summons. 

The borrower can then decide to allow the foreclosure process to proceed, or they can contest it by appearing in court. During the case, if the court decides in favor of the lender, it will enter a judgment that will order the property to be sold to satisfy the outstanding debt. 

In some states, if the sale proceeds don’t cover the outstanding debt, then the lender could be able to seek a deficiency judgment. This would allow the lender to obtain a personal judgment from the borrower so they can recover the difference between the outstanding debt amount and what the house sold for during the foreclosure sale.

One exception to this process is if the borrower has filed bankruptcy and chosen to include the home in the process, which could result in a discharged mortgage.

Non-Judicial Foreclosure: A Different Approach

The other main type of foreclosure is called a non-judicial foreclosure. In the state of Michigan, this is commonly known as a foreclosure by advertisement. While there are some similarities between this type and judicial foreclosures, there are major differences, too.

Key Differences Between Judicial and Non-Judicial Foreclosure

The biggest difference between a judicial and non-judicial foreclosure is that a non-judicial foreclosure doesn’t involve the court system at all. In states that allow it, lenders can foreclose on a home without going through the court system.

The deed of trust or a mortgage on the home will authorize a neutral, third-party trustee, or through the county sheriff’s office to conduct the foreclosure by advertisement process on the property if a borrower defaults on the loan. This process is able to move forward if there’s a “power-of-sale” clause in the mortgage note, which gives the lender the right to sell the house and use whatever profits they obtain to pay off the balance of the mortgage.

The rules and regulations for non-judicial foreclosures vary widely by state, and state law will determine which milestones need to be reached for each step of the foreclosure process. Even one missed payment in some states can trigger the process and allow lenders to start the foreclosure process.

State-by-State Variations in Foreclosure Laws

As mentioned, there are major state-by-state variations in foreclosure laws. The laws that apply are based on where the home is located, not where the lender is located.

Understanding your individual state’s laws when it comes to foreclosure is important, because it outlines what your rights as a borrower are, in addition to outlining what lenders must do to foreclose on a property.

Not only will the state laws determine whether a judicial or non-judicial foreclosure will be used, but they’ll also determine how long the foreclosure process will take, whether deficiency judgments are allowed, what notifications must be given to the borrower and when, whether the borrower can redeem the property during the process and much, much more.

There are 18 states that allow judicial foreclosure, though some of those states also allow non-judicial foreclosures in some instances. In Iowa, for example, a non-judicial foreclosure option is available if the borrower and lender can agree on it. 

The remaining 32 states either allow for non-judicial foreclosure, or offer both as options for lenders.

Understanding Deficiency Judgment Laws Across the US

The reason why it’s important to understand your state’s foreclosure laws is that they determine what actions can trigger foreclosure. For instance, in some states, being late on your mortgage payments by even one day is enough for a lender to foreclose.

The entire foreclosure process can take different amounts of time to complete, depending on the state, as well. Plus, some states allow for borrowers to cure/reinstate their mortgages along the way, and some allow for foreclosure mediation and adjustments to the original mortgage.

In addition, some states allow for deficiency judgments, which is basically a personal judgment that’s levied against the borrower should there be a discrepancy between how much the home sold for during the foreclosure sale and the total amount owed on the mortgage.

In these states, borrowers are at risk of not only losing their home through the foreclosure process, but also having to pay this deficiency — which can end up being very costly.

Deficiency judgment is allowed in all but six states, with some exceptions. In only Washington state, Oregon, Montana, Minnesota, California and Alaska is deficiency judgment not allowed in most cases. All of those states are also non-judicial foreclosure states.