Foreclosure Process In Minnesota
With adjustable mortgage rates climbing some homeowners are being priced out of their homes. Here are some answers to your questions regarding foreclosure and short sales from the perspective of a homeowner facing tough decisions.
Pre-foreclosure - While there is no strict legal definition of a "pre-foreclosure" in Minnesota, it is generally considered to be the period of time starting when the homeowner first acknowledges they can no longer make their mortgage payments and ends when the lender decides to begin the legal process of foreclosing on the property. Many lenders will begin the foreclosure process after 3 or 4 missed mortgage payments, but it is up to the individual lender to decide when to begin the foreclosure process.
The homeowner has an opportunity to prevent the foreclosure during this period by:
- Selling their home and using the proceeds to pay the lender in full.
- Contacting the lender to advise them of their situation. Many lenders will work with the homeowner - within reasonable limits - to avoid a foreclosure.
- Paying all missed payments and penalties to come current on the loan.
- HUD approved counseling agencies may also provide you with assistance.
There are many foreclosure prevention schemes and plans. Consumers need to be sure they understand the situation completely before choosing a course of action. Since a foreclosure can ruin your credit for up to 10 years, it is very important to avoid a full foreclosure if at all possible.
This can be an emotional time and expert advice is critical. Try not to dwell on what you could have gotten for your home several years ago or being too inflexible if you decide to sell. Remember the goal is to extricate yourself from a bad situation, hopefully without ruining your credit.
Foreclosures Halted in 23 States
How to Avoid Foreclosure, Part 1
How to Avoid Foreclosure, Part 2
How to Avoid Foreclosure, Part 3
How does the foreclosure process work? In Minnesota, the legal process is quite different than in many other states. When doing your research, make sure you focus on Minnesota law. The lender may begin the foreclosure process immediately after the borrower defaults on the loan. The following is a basic timeline of events.
Most mortgages in Minnesota contain a power of sale clause. This gives the lender the right to conduct a foreclosure and sell the property without actually going to court. This is also known as a foreclosure by advertisement. The other method which involves the court system is called a judicial foreclosure and is used when the mortgage does not contain the power of sale clause. However, the lender may choose the judicial foreclosure process even when a power of sale clause is included in the mortgage contract.
I will focus on the most common method, which is the foreclosure by advertisement. The lender must advertise the foreclosure in a newspaper in the country where the property is located for at least 6 weeks before selling it to the highest bidder at a public auction. The auction is conducted by the county sheriff and is also known as a sheriff's sale.
A copy of the notice of foreclosure must be sent to the borrower at least 4 weeks before the sheriff's sale. This notice contains the legal description, names of the lender and the borrower(s), the original principal amount, the redemption period, the time and place of the sheriff's sale, and other pertinent information.
There are two redemption or reinstatement periods. The first one is known as the borrower's equity of redemption - this is the period of time before the sheriff's sale. In the case of a foreclosure by advertisement, this period is at least the 6 weeks between the initiation of the process and the sheriff's sale. To cure the default during this time, the borrower must pay all past-due installments and penalties.
The other reinstatement period is the statutory redemption period, which gives the borrower a chance to redeem the property after the sheriff's sale. In the case of most residential mortgages in Minnesota, it is 6 months.
However, if the property is abandoned, it can be as little as 5 weeks. Evidence of abandonment, such as: termination of utilities, two or more police reports of trespassing or vandalism, safety problems, broken windows, sanitation problems, broken doors, or other signs must be present. This rule 5 week rule only applies to residential properties with no more than four units and under 10 acres.
In some special circumstances, the statutory redemption period is 12 months:
- the mortgage is more than 1/3 paid off,
- the property is more than 40 acres,
- the property is more than 10 acres AND in agricultural use,
- the property is more than 10 acres AND the mortgage was originated prior to July 1st, 1987.
To redeem the property during this period, the borrower must pay the amount of the high bid at the sheriff's sale plus interest. The high bidder at the foreclosure sale cannot take possession of the property until the end of the statutory redemption period and the borrower is generally entitled to remain in possession until then.
At the sheriff's sale, the high bidder receives a sheriff's certificate of sale which is recorded by the county. At the end of the statutory redemption period the recorded document becomes a sheriff's deed. It is at this point that the high bidder obtains the right to posses the property.
There are generally not very many bidders at the sheriff's sale because of the long redemption period. Most investors do not want to wait that long or they do not wish to purchase the rights to the mortgage without being able to inspect the property. Most of the time, the lender is the high bidder.
If the proceeds of the sheriff's sale are insufficient to pay the loan in full and the 12 month statutory redemption applies and the foreclosure by advertisement process was used, the lender may seek a personal deficiency judgment against the borrower to cover the difference. However, if the statutory redemption period was either 5 weeks or 6 months, the lender is limited to the proceeds of the sheriff's sale and may not take further action against the borrower. The lender has the option of a judicial foreclosure if they wish to seek a deficiency judgment.
In the rare event that the sheriff's sale generates more than the amount owed plus any liens or other costs, the remainder is returned to the borrower who defaulted on the loan.
If more than one lender is involved the junior lien holders may pay off the primary lender in order to protect their interests in the property. This is the case when there is a 2nd mortgage or when mortgages are "piggy backed" (such as a 80/15/5 mortgage).
You may have heard the term strict foreclosure - this may occur as part of a judicial foreclosure. It is when the court terminates the borrower's rights to the property and gives the property back to the lender. There is no sheriff's sale in a strict foreclosure.
How can you avoid a foreclosure? Because a foreclosure can ruin your credit for up to 10 years, you may wish to avoid a full foreclosure. But be very careful - foreclosure prevention scams are becoming more common. Make sure you understand the situation before you choose a course of action.
You might be able to avoid the additional costs associated with foreclosure and save your credit by give the lender a Deed in lieu of foreclosure. This is where the borrower simply deeds the property back to the lender without going through the foreclosure process. Lenders are not required to accept this method, but they may be willing to do so in order to save them the time and expense of foreclosing on the property.
Sometimes, it is possible to convince a lender to stop the foreclosure process in order to negotiate a short sale which is a settlement where the lender agrees to release their lien on the property and accept less than the full amount owed on the mortgage. This is also why it is important not to procrastinate.
Or, you may be able to sell the property on the open market before the end of the statutory redemption period. This may involve a short sale when the market value of the property is less than what is owed on the property. The lender may agree to a short sale in order to avoid a loss. Because the lender generally incurs the full cost of the foreclosure (legal fees, upkeep on the property, depreciation, rehabilitation, cost to resell, etc.) I can sometimes convince them to accept a short offer.
In the case of a foreclosure, it is often easier to sell a vacant property. You need to be prepared to move on short notice.
The approval for a short sale may take several months or it may not be approved at all. Some lenders have committees that make the decision and there may also be insurers and other investors involved. If the original mortgage was sold on the secondary market, it may be nearly impossible to get approval for a short sale. Either way, short sales often take quite a bit of negotiating on my part. There are no guarantees that the lender will agree to a short sale. Once you have defaulted on a mortgage, the lender controls the situation and may proceed as they see fit.
One of the conditions of a short sale is that the borrower does not receive any of the proceeds of the sale. Since the lender is going to take a loss they insist that you do not benefit from the sale.
If the lender agrees to full satisfaction of the mortgage via short sale, then they may be tax consequences and you should consult your tax professional in this regard. It is very likely that the lender will issue you a 1099 for the difference between the amount owed and the amount the lender collects after all costs associated with the sale are subtracted. Some lenders may even attempt to get the borrower to sign a promissory note for the remaining amount due.
Lenders are not interested in bailing out borrowers who foolishly overextended themselves. Most of the time, they will require a review of the borrower and only agree to a short sale when there are mitigating circumstances such as a serious illness, layoff, or death. Lenders are not likely to approve a short sale for investors, borrowers with substantial assets, or those who were attempting to flip a home for financial gain.
Your lender will require a review of your financial situation including a written statement explaining your inability to make your mortgage payments. You should also be prepared to provide them with two months' pay stubs, two months' bank statements, your last two tax returns, and possibly other financial information. A delay or denial of a short sale can be caused by the borrower's inability to provide the timely delivery of the documentation necessary for a full financial review.
Foreclosures Halted in 23 States
How to Avoid Foreclosure, Part 1
How to Avoid Foreclosure, Part 2
How to Avoid Foreclosure, Part 3
