What it means to be underwater in your home

April 3rd, 2012 by Tiffany Hughes

Foreclosure law and how to keep your home

What Is a Foreclosure?

In recent years, “foreclosure” has become an “F-word” for homeowners. But what is it, exactly? Generally, for residential properties, foreclosure is the legal process by which lenders sell or repossess the home after the owners fail to keep up with monthly mortgage payments (http://en.wikipedia.org/wiki/Foreclosure). Losing home ownership is a painful experience, and one that doesn’t happen overnight. How, then, do people find themselves in this situation?

Deadlines differ in each state, but this is how the process works in Illinois for most residential real estate, under 735 ILCS 5/15-1101 et seq. (http://www.illinoisprobono.org/index.cfm?fuseaction=home.dsp_Content&contentID=327). If an owner has missed at least one monthly payment, the lender is required under Illinois law to send notice, advising the owner to consult a housing counselor within the next 30 days. These counselors are available through programs such as the federal Making Homes Affordable Program and the Chicago Bar Association. If the owner obtains help, she has an additional 30-day grace period. If the owner still doesn’t pay what’s due, or doesn’t make other arrangements before that 30-day deadline, the lender sends her notice that it will foreclose on her home. The lender’s attorneys, from either an in-house law department or an outside firm, begin foreclosure proceedings.

The lender files a complaint with the court and serves the owner with notice of the complaint. Before her home is lost, the owner still has a chance to reclaim her property during what’s known as the redemption period (735 ILCS 5/15-1603). To do this, she must pay the full amount that she owes the lender, including the principal balance, plus any interest, fees, and other foreclosure costs. The redemption period is seven months from the date of service, or three months from the date that judgment of foreclosure was entered, whichever deadline comes later. The owner can also reinstate the mortgage by paying whatever is past-due (including interest, fees, and costs) within 90 days from the day she was served (735 ILCS 5/15-1602).

If the owner doesn’t redeem or reinstate, the property is put up for sale. The day of the actual foreclosure is the day the attorneys arrange for the home to the sold. The owner has no right of redemption or reinstatement after the home is sold (735 ILCS 5/15-1605).

Alternatives to Foreclosure

In June of 2011, the national rate of foreclosure was 1 of 583 – that is, 1 out of every 583 homes was in active foreclosure. In Illinois, 1 out of every 480 homes was in foreclosure, giving this state one of the highest foreclosure rates in the country that month. (http://usliberals.about.com/od/Election2012Factors/a/Foreclosure-Rates-By-State.htm) Foreclosure, however, is not inevitable. Attorneys have many tools to assist owners faced with losing their homes.

Keeping the Property

If homeowners want to keep the property, they must ask themselves, “What can I afford?” Under the federal Making Homes Affordable Program, housing counselors will work with lenders and homeowners to modify or refinance loans to apply current low-interest rates. One plan under this program lowers monthly payments. Another can possibly reduce the total amount of the loan, if the owner’s home is worth much less than the amount owed (http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure).

Another way to keep the property is to reclaim the home during the redemption or reinstatement periods, as described above. This puts a slightly different spin on the question, “Can I afford my home?” For Illinois homeowners, the foreclosure process is already underway during this time. It may be difficult to pay the amounts required by the law because they include extra costs and fees incurred during the process (735 ILCS 5/15-1602 & 1603).

The owner may also declare herself bankrupt. A Chapter 13 filing allows her to keep the house, while a Chapter 7 filing does not. Of course, owners must meet certain conditions before they can declare bankruptcy (http://www.illinoisprobono.org/index.cfm?fuseaction=home.dsp_Content&contentID=327).

Giving Up the Property

Sometimes, giving up the property is in the owner’s best financial interests. The owner may want to move into more affordable housing, or she may simply not be able to afford her home anymore. One common reason for letting go is that the owner is faced with an “underwater” mortgage: the market value of the home has decreased over the years and is now less than the amount originally owed to the lender (http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure). For example: A homeowner borrows $300,000 from the bank to buy a house. She agrees to pay back the amount, plus interest, over 30 years. After ten years, her house goes down in value and is now worth only $200,000.

In this situation, the owner can give up the property in two ways. The first method is through a short sale, where the owner sells the property to the lender for market value, and the lender agrees to buy it even though it is worth less than what is owed on the property. This does not guarantee that the rest of the debt is wiped out – the lender can still collect on any deficiencies of the loan, unless the parties agree otherwise (http://en.wikipedia.org/wiki/Short_sale_(real_estate)). The second method is through a deed-in-lieu, where the lender accepts the deed to the property as fulfillment of the debt. (735 ILCS 5/15?1401).

Shopping For Real Estate in Illinois

While browsing Chicago listings for properties, it’s not enough for a buyer to simply ask, “What home can I afford?” Buyers considering real estate purchases should remember that this process goes hand in hand with will planning. Estate and trust law are just two areas of law where Tiffany Hughes can assist buyers. Those who are already homeowners and are facing underwater mortgages can also benefit from Tiffany’s expertise. While some attorneys bill for services that are unnecessary, Tiffany will provide buyers and current homeowners with the legal information they need, and she will do so at a fair price and with a deep understanding of their difficult situation. Contact her offices in Chicago to learn more about how she can help, whether you are looking for a foreclosure attorney, Cook County property, or answers to what is payment owned on your home.