Legal Encyclopedia Table of Contents

Mistakes Made by New Businesses: The Top Ten
Start Your Own Business: 50 Things You'll Need to Do
Choosing the Best Ownership Structure for Your Business
Buying or Selling a Business: An Overview
Ten Terms to Include in Your Lease or Rental Agreement
New Home Ownership and Equity Protection Act (HOEPA) Rules for First Mortgages
Buying a Foreclosed Home: Pros and Cons
Mold in the Home: What Homebuyers Need to Know
Short Sales and Deeds in Lieu of Foreclosure
Mortgage Refinancing to Avoid Foreclosure: The HOPE for Homeowners Act
Defenses to Foreclosure
Don’t Lose Your Home to Foreclosure “Rescue” Scammers
Mortgage Modification and Refinancing Under the Homeowner Affordability and Stability Plan

Legal FAQ Table of Contents

Foreclosure FAQ

Mistakes Made by New Businesses: The Top Ten

Republished with Permission © 2009 Nolo.

by Bethany K. Laurence

Learn about the most common mistakes that new business owners make and how to avoid them.

Most small businesses fail within the first five years, often from a lack of planning at the outset. There are a number of financial pitfalls that new businesses must avoid in order to survive. You can improve your new business’ chance of succeeding by learning about, and taking steps to avoid, the top ten mistakes new business owners make.

1) Starting Your Business With a Large Loan

Many small business owners make the mistake of borrowing large amounts -- either from banks, credit card companies, home equity loans, or friends and family -- to start their businesses. Because these business owners start off owing so much money, they feel pressured to make a profit immediately -- and they may have to make high monthly payments on the loans. A wiser approach is to save a good amount of money and to rely mostly on those savings when you begin your business.

2) Planning on Making a Profit Right Away

Most small businesses are not profitable within their first year or two. You should have a reliable source of income from something other than your new business to sustain yourself during your start-up period.

3) Spending Too Much Money at the Beginning

Many small businesses spend too much money “setting up shop,” buying equipment and furniture, and investing in business cards and brochures. Plan to start on a shoestring. And remember, if you spend a lot of money, that’s more money you can lose if the business fails.

4) Hiring Employees You Don’t Need  

Hiring employees subjects you to registration and record keeping requirements and can be very expensive. You'll have to pay unemployment taxes, withhold state and federal income taxes (as well as Medicare and Social Security taxes), pay for workers' compensation insurance, and comply with safety regulations to avoid injury to your workers.

You may face severe penalties -- and may even be found to be personally liable -- if you don't comply with all of these requirements. If you need help with your business, consider hiring an independent contractor or a worker from a temp agency rather than a permanent employee.

5) Renting Space You Don’t Need

Renting space is usually not necessary when you're just starting out. Often times, you can work from home. Running your business from home can save you tax dollars too.

Renting commercial space is expensive, and if you need to make modifications to the space, can be even more so.  If your business doesn't work out or you can't afford to rent and have to move, you’ll probably owe the landlord rent until your lease runs out. You will most likely be personally liable for these payments because most landlords require small business owners to sign personal guarantees, even if the business is officially an LLC or a corporation.

6) Not Developing a Business Plan

Even if you’re not soliciting money from investors, business plans are useful. Come up with a financial forecast to see if your business can make money and will have money year-round. Among other things, consider:

Your business plan should include a break-even analysis, profit-and-loss forecast, and a cash flow analysis.

7) Not Knowing How to Collect Bills

One of biggest problems new small businesses face is collecting bills. You should be aware that some clients may not pay their invoices on time. So plan to spend some time collecting what is owed to you -- you might need to re-bill clients or to contact them personally when they are late in paying you.

8) Not Planning for Cash Flow Problems

There may be times when your business runs low on cash, either because business is slow or because your clients or customers are late in paying you.  You should either apply for a credit line with a bank or develop some other emergency plan for how you are going to pay your bills when you don’t have enough cash to do so.

9) Not Planning to Protect Personal Assets

You don't want your business debts to endanger your personal assets, such as your home or your savings account. Some options for protecting your personal assets include purchasing liability insurance for your business, and structuring your business as a corporation or an LLC.

10) Choosing the Wrong Ownership Structure

Choosing an ownership structure is one of the most important decisions you’ll make for your new business.

Consider your specific needs. The following factors can help in making your decision:

Consider your potential liability. Here is a summary of the amount of liability you may face depending on how you structure your business:

Consider what most people do. For most people starting a one-person business, operating as a sole proprietor at the outset makes sense. But, if your business is especially likely to be sued, is funded by outside investors, or might be profitable right from the start, consider forming an LLC instead.

For most people starting a business with more than one owner, an LLC is preferable to a partnership -- you get limited liability but need to do less record-keeping than a corporation, and the same taxation as a partnership.

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on business law or e-mail our San Diego legal firm at shaun.bosslaw@sbcglobal.net

To steer clear of mistakes that can sink your business, get The Small Business Start-Up Kit: A Step-by-Step Legal Guide, by Peri H. Pakroo (Nolo).

Start Your Own Business: 50 Things You'll Need to Do

Republished with Permission © 2009 Nolo.

From insurance to accounting to taxes, here’s what you need to do to start a business.

Thinking about starting a business? You’re not alone. Every year, thousands of Americans catch the entrepreneurial spirit, launching small businesses to sell their products or services. Some businesses thrive; many fail. The more you know about starting a business, the more power you have to form an organization that develops into a lasting source of income and satisfaction. For help with the beginning stages of operating a business, the following checklist is a great place to start.

Evaluate and Develop Your Business Idea

1. Determine if the type of business suits you.

2. Use a break-even analysis to determine if your idea can make money.

3. Write a business plan, including a profit/loss forecast and a cash flow analysis.

4. Find sources of start-up financing.

5. Set up a basic marketing plan.

Decide on a Legal Structure for Your Business

6. Identify the number of owners of your business.

7. Decide how much protection from personal liability you'll need, which depends on your business's risks.

8. Decide how you'd like the business to be taxed.

9. Consider whether your business would benefit from being able to sell stock.

10. Research the various types of ownership structures:

11. Get more in-depth information from a self-help resource or a lawyer, if necessary, before you settle on a structure.

Choose a Name for Your Business

12. Think of several business names that might suit your company and its products or services.

13. If you will do business online, check if your proposed business names are available as domain names.

14. Check with your county clerk's office to see whether your proposed names are on the list of fictitious or assumed business names in your county.

15. For corporations and LLCs: check the availability of your proposed names with the Secretary of State or other corporate filing office.

16. Do a federal or state trademark search of the proposed names still on your list. If a proposed name is being used as a trademark, eliminate it if your use of the name would confuse customers or if the name is already famous.

17. Choose between the proposed names that are still on your list.

Register Your Business Name

18. Register your business name with your county clerk as a fictitious or assumed business name, if necessary.

19. Register your business name as a federal or state trademark if you'll do business regionally or nationally and will use your business name to identify a product or service.

20. Register your business name as a domain name if you'll use the name as a Web address too.

Prepare Organizational Paperwork

21. Partnership:

22. LLC:

23. C Corporations:

24. S Corporations:

Find a Business Location

25. Identify the features and fixtures your business will need.

26. Determine how much rent you can afford.

27. Decide what neighborhood would be best for your business and find out what the average rents are in those neighborhoods.

28. Make sure any space you're considering is or can be properly zoned for your business. (If working from home, make sure your business activities won't violate any zoning restrictions on home offices.)

29. Before signing a commercial lease, examine it carefully and negotiate the best deal.

File for Licenses and Permits

30. Obtain a federal employment identification number by filing IRS Form SS-4 (unless you are a sole proprietorship or single-member limited liability company without employees).

31. Obtain a seller's permit from your state if you will sell retail goods.

32. Obtain state licenses, such as specialized vocation-related licenses or environmental permits, if necessary.

33. Obtain a local tax registration certificate, a.k.a. business license.

34. Obtain local permits, if required, such as a conditional use permit or zoning variance.

Obtain Insurance

35. Determine what business property requires coverage.

36. Contact an insurance agent or broker to answer questions and give you policy quotes.

37. Obtain liability insurance on vehicles used in your business, including personal cars of employees used for business.

38. Obtain liability insurance for your premises if customers or clients will be visiting.

39. Obtain product liability insurance if you will manufacture hazardous products.

40. If you will be working from your home, make sure your homeowner's insurance covers damage to or theft of your business assets as well as liability for business-related injuries.

41. Consider health & disability insurance for yourself and your employees.

Set Up Your Books

42. Decide whether to use the cash or accrual system of accounting.

43. Choose a fiscal year if your natural business cycle does not follow the calendar year (if your business qualifies).

44. Set up a recordkeeping system for all payments to and from your business.

45. Consider hiring a bookkeeper or accountant to help you get set up.

46. Purchase Quicken Home and Business (Intuit), QuickBooks (Intuit) or similar small business accounting software.

Set Up Tax Reporting

47. Familiarize yourself with the general tax scheme for your business structure. (See Tax Savvy for Small Business, by attorney Frederick Daily.)

48. Familiarize yourself with common business deductions and depreciation. (See Deduct It! Lower Your Small Business Taxes, by attorney Stephen Fishman.)

49. Obtain IRS Publications 334, Tax Guide for Small Business, and 583, Taxpayers Starting a Business.

50. Obtain the IRS's Tax Calendar for Small Businesses.

As you can see, starting a business involves making quite a few initial decisions and getting policies and paperwork in place. For more information about and help with starting a business, consult the following Nolo resources: Legal Guide for Starting and Running a Small Business, by attorney Fred Steingold; Wow! I’m in Business, by attorneys Richard Stim and Lisa Guerin; or Quicken Legal Business Pro (software).

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on starting a new business or e-mail our San Diego legal firm at shaun.bosslaw@sbcglobal.net

Choosing the Best Ownership Structure for Your Business

Republished with Permission © 2009 Nolo.

The right structure -- corporation, LLC, partnership, or sole proprietorship -- depends on who will own your business and what its activities will be.

When you start a business, you must decide whether it will be a sole proprietorship, partnership, corporation, or limited liability company (LLC).

Which of these forms is right for your business depends on the type of business you run, how many owners it has, and its financial situation. No one choice suits every business: Business owners have to pick the structure that best meets their needs. This article introduces several of the most important factors to consider, including:

Risks and Liabilities

In large part, the best ownership structure for your business depends on the type of services or products it will provide. If your business will engage in risky activities -- for example, trading stocks or repairing roofs -- you'll almost surely want to form a business entity that provides personal liability protection ("limited liability"), which shields your personal assets from business debts and claims. A corporation or a limited liability company (LLC) is probably the best choice for you.

Formalities and Expenses

Sole proprietorships and partnerships are easy to set up -- you don't have to file any special forms or pay any fees to start your business. Plus, you don't have to follow any special operating rules.

LLCs and corporations, on the other hand, are almost always more expensive to create and more difficult to maintain. To form an LLC or corporation, you must file a document with the state and pay a fee, which ranges from about $40 to $800, depending on the state where you form your business. In addition, owners of corporations and LLCs must elect officers (usually, a president, vice president, and secretary) to run the company. They also have to keep records of important business decisions and follow other formalities.

If you're starting your business on a shoestring, it might make the sense to form the simplest type of business -- a sole proprietorship (for one-owner businesses) or a partnership (for businesses with more than one owner). Unless yours will be a particularly risky business, the limited personal liability provided by an LLC or a corporation may not be worth the cost and paperwork required to create and run one.

Income Taxes

Owners of sole proprietorships, partnerships, and LLCs all pay taxes on business profits in the same way. These three business types are "pass-through" tax entities, which means that all of the profits and losses pass through the business to the owners, who report their share of the profits (or deduct their share of the losses) on their personal income tax returns. Therefore, sole proprietors, partners, and LLC owners can count on about the same amount of tax complexity, paperwork, and costs.

Owners of these unincorporated businesses must pay income taxes on all net profits of the business, regardless of how much they actually take out of the business each year. Even if all of the profits are kept in the business checking account to meet upcoming business expenses, the owners must report their share of these profits as income on their tax returns.

In contrast, the owners of a corporation do not report their shares of corporate profits on their personal tax returns. The owners pay taxes only on profits they actually receive in the form of salaries, bonuses, and dividends.

The corporation itself pays taxes, at special corporate tax rates, on any profits that are left in the company from year to year (called "retained earnings"). Corporations also have to pay profits on dividends paid out to shareholders, but this rarely affects small corporations, which seldom pay dividends. 

This separate level of taxation adds a layer of complexity to filing and paying taxes, but it can be a benefit to some businesses. Owners of a corporation don't have to pay personal income taxes on profits they don't receive. And, because corporations enjoy a lower tax rate than most individuals for the first $50,000 to $75,000 of corporate income, a corporation and its owners may actual have a lower combined tax bill than the owners of an unincorporated business that earns the same amount of profit.

Investment Needs

Unlike other business forms, the corporate structure allows a business to sell ownership shares in the company through its stock offerings. This makes it easier to attract investment capital and to hire and retain key employees by issuing employee stock options.

But for businesses that don't need to issue stock options and will never "go public," forming a corporation probably isn't worth the added expense. If it's limited liability that you want, an LLC provides the same protection as a corporation, but the simplicity and flexibility of LLCs offer a clear advantage over corporations. For more help on choosing between a corporation and an LLC, read the article Corporations vs. LLCs.

Next Steps

Nolo's book LLC or Corporation? How to Choose the Right Form for Your Business, by attorney Anthony Mancuso, provides lots of real-world scenarios that demonstrate how these options work for different types of companies.

 After learning the basics of each business structure and considering the factors discussed above, you may still find that you need help deciding which structure is best for your business. A good small business or tax lawyer can help you choose the right one, given your tax picture and the possible risks of your particular situation.

Changing Your Mind

Your initial choice of a business structure isn't set in stone. You can start out as sole proprietorship or partnership and later, if your business grows or the risk of personal liability increases, you can convert your business to an LLC or a corporation.

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on business law or e-mail our San Diego legal firm at:  shaun.bosslaw@sbcglobal.net

Buying or Selling a Business: An Overview

Republished with Permission © 2009 Nolo.

Here are the steps you'll need to take when you're considering selling or buying a business.

Each year, some 700,000 U.S. businesses change ownership. Most are small and mid-sized businesses, like retail stores, beauty salons, quick-print shops, restaurants, tax preparation services, landscapers, electrical contracting firms, and modest manufacturing operations. If you're thinking about buying or selling a business and want to get the best deal possible, expect to do a lot of planning and preparation.

Selling a Business

No matter what kind of business you own -- a professional services company, a neighborhood bagel shop, or a home-based website that sells imported garden tools -- there’s likely to be an interested buyer or two out there (assuming the price is right). But finding the right buyer and selling the business on favorable terms will require both planning and hard work.

Your first step is considering whether you’re ready to sell. Other steps will include understanding the sales process, preparing your company for sale, setting a price, seeking potential buyers, negotiating and preparing a sales agreement and other documents, and closing the deal. For more information, see Selling or Closing a Business.

Buying a Business

If you’re planning to buy a business, you also have many factors to consider. These include whether owning a business is right for you or for your lifestyle, what the potential for success in the field you’ve chosen is, and the risks involved. Owning a business can mean that you have signed on for longer hours and more worries than you’ve ever experienced as a hired hand -- but if you succeed, the financial and personal rewards are yours to savor. And of course, if you own your own business, no one can fire you.

Other things to consider include whether to buy a franchise or an independent business, how to find a business for sale, how to know whether the asking price is reasonable, and how to research the business's history and finances (what lawyers call doing "due diligence").

For more information, see Buying a Business.

Enjoy!

Whether you're selling your long-held business or buying a new one, enjoy this next, fresh phase of your life!

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on business law or e-mail our San Diego legal firm at:  shaun.bosslaw@sbcglobal.net

Ten Terms to Include in Your Lease or Rental Agreement

Republished with Permission © 2009 Nolo.

What should be included in every lease or rental agreement.

A lease or rental agreement sets out the rules landlords and tenants agree to follow in their rental relationship. It is a legal contract, as well as an immensely practical document full of crucial business details, such as how long the tenant can occupy the property and the amount of rent due each month. Whether the lease or rental agreement is as short as one page or longer than five, typed or handwritten, it needs to cover the basic terms of the tenancy.

Here are some of the most important items to cover in your lease or rental agreement.

1. Names of all tenants. Every adult who lives in the rental unit, including both members of a married or unmarried couple, should be named as tenants and sign the lease or rental agreement. This makes each tenant legally responsible for all terms, including the full amount of the rent and the proper use of the property. This means that you can legally seek the entire rent from any one of the tenants should the others skip out or be unable to pay; and if one tenant violates an important term of the tenancy, you can terminate the tenancy for all tenants on that lease or rental agreement.

2. Limits on occupancy. Your agreement should clearly specify that the rental unit is the residence of only the tenants who have signed the lease and their minor children. This guarantees your right to determine who lives in your property -- ideally, people whom you have screened and approved -- and to limit the number of occupants. The value of this clause is that it gives you grounds to evict a tenant who moves in a friend or relative, or sublets the unit, without your permission.

3. Term of the tenancy. Every rental document should state whether it is a rental agreement or a fixed-term lease. Rental agreements usually run from month-to-month and self-renew unless terminated by the landlord or tenant. Leases, on the other hand, typically last a year. Your choice will depend on how long you want the tenant to stay and how much flexibility you want in your arrangement.

4. Rent. Your lease or rental agreement should specify the amount of rent, when it is due (typically, the first of the month), and how it's to be paid, such as by mail to your office. To avoid confusion and head off disputes with tenants, spell out details such as:

5. Deposits and fees. The use and return of security deposits is a frequent source of friction between landlords and tenants. To avoid confusion and legal hassles, your lease or rental agreement should be clear on:

It's also a good idea (and legally required in a few states and cities) to include details on where the security deposit is being held and whether interest on the security deposit will be paid to the tenant.

6. Repairs and maintenance. Your best defense against rent-withholding hassles and other problems (especially over security deposits) is to clearly set out your and the tenant's responsibilities for repair and maintenance in your lease or rental agreement, including:

7. Entry to rental property. To avoid tenant claims of illegal entry or violation of privacy rights, your lease or rental agreement should clarify your legal right of access to the property -- for example, to make repairs -- and state how much advance notice you will provide the tenant before entering.

8. Restrictions on tenant illegal activity. To avoid trouble among your tenants, prevent property damage, and limit your exposure to lawsuits from residents and neighbors, you should include an explicit lease or rental agreement clause prohibiting disruptive behavior, such as excessive noise, and illegal activity, such as drug dealing.

9. Pets. If you do not allow pets, be sure your lease or rental agreement is clear on the subject. If you do allow pets, you should identify any special restrictions, such as a limit on the size or number of pets or a requirement that the tenant will keep the yard free of all animal waste.

10. Other Restrictions. Be sure your lease or rental agreement complies with all relevant laws including rent control ordinances, health and safety codes, occupancy rules, and antidiscrimination laws. State laws are especially key, setting security deposit limits, notice requirements for entering rental property, tenants' rights to sublet or bring in additional roommates, rules for changing or ending a tenancy, and specific disclosure requirements such as past flooding in the rental unit.

Any other legal restrictions, such as limits on the type of business a tenant may run from home, should also be spelled out in the lease or rental agreement. Important rules and regulations covering parking and use of common areas should be specifically mentioned in the lease or rental agreement.

For details, see your state's landlord-tenant statutes, or Every Landlord's Legal Guide, by Marcia Stewart and attorneys Ralph Warner and Janet Portman (Nolo).

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on San Diego real estate law or e-mail our San Diego legal firm at:  shaun.bosslaw@sbcglobal.net

New Home Ownership and Equity Protection Act (HOEPA) Rules for First Mortgages

Republished with Permission © 2009 Nolo.

by Broderick Perkins

The new HOEPA rules require stricter screening by mortgage lenders and other requirements.

New Truth in Lending rules approved in 2008 by the Federal Reserve should foster more responsible mortgage lending and give consumers additional protection from predatory mortgages. The combination of tougher regulations and stronger consumer rights are also designed to help prevent a future credit-based housing crisis, but consumers will have to demonstrate greater responsibility when it comes to borrowing for a home. They must come to the table with documented evidence they can truly handle the costs of homeownership.

HOEPA was enacted in 1994 to target abusive practices in home equity lending -- second mortgages. The new rules, an amendment to Regulation Z (Truth in Lending), extend HOEPA-like rules and consumer protections to home acquisition mortgages -- first mortgages, and especially subprime loans. To some extent, the new rules effectively codify actions that risk-adverse lenders have already instituted. The stiffer underwriting actions by lenders have been designed to shore up portfolios battered by questionable home loans largely blamed for both the economy's credit crunch and the bust in the housing sector.

Lenders have until October 1, 2009 to fully comply with rules that will keep lenders from backsliding once the market improves. Most of the new rules apply only to higher-priced mortgages -- mortgages that have higher interest rates due to a borrower's poor credit, low down payment, or jumbo loan amount. Here are the key regulatory provisions and how they impact consumers.

Stricter Screening and Repayment Analysis

Lenders are prohibited from making home loans without regard to borrowers' ability to repay the loan from income and assets other than the home's value. Compliance requires a lender to assess repayment ability based on the highest scheduled payment in the first seven years of the loan.

This forces lenders to more closely scrutinize a borrower's debt-to-income ratio, looking for less debt, more income and savings, larger down payments and other liquid assets the borrower can fall back on if necessary. Lenders today already want to see sound financials from consumers applying for mortgages.

Consumers will now have to take more time to save larger down payments, pay off more debt, and maintain a pristine credit report for longer periods before buying a home.

More Documentation Required

Lenders must now verify income and assets used to determine repayment ability. Many so-called "no-doc" loans -- loans granted without documenting qualifying financial information -- are already history. Consumers can no longer just pencil in an arbitrary income amount, but must solidly document income and assets and their source as well as the viability of the numbers and the source. That means longevity on the job and more time holding assets.

This provision especially squeezes home-based business owners, self-employed people, contract workers, and others who don't get a regular pay stub. Lenders already ask many of these borrowers for a certified public accountant's or other tax professional's certified profit and loss statement to reveal income viability. A tax return is often no longer sufficient proof.

New Rules on Prepayment Penalties

Prepayment penalties that often came with low-initial cost and subprime loans were common before and during the housing boom. The exorbitant penalties had to be paid by borrowers who wanted to refinance or sell the home after holding the mortgage only a few years. Homeowners were often compelled to refinance because the same loans that came with prepayment penalties also could be negatively amortizing mortgages or loans with a balloon mortgage payment that warranted escape. However, with penalties so high -- equal to interest payments for six months -- they locked borrowers into an unaffordable loan, even when a more affordable loan was available.

The new rules ban prepayment penalties on some loans from changing in the first four years. On other loans, the new rules prevent a prepayment penalty period from lasting for more than two years. That is, after the two-year period, the borrower is free to refinance or sell the home without penalty.

With the new prepayment penalty restrictions, lenders will offer a narrower variety of loans, forcing many consumers out of the market and other consumers to spend more time shopping around. Shopping around, of course, is a smart practice.

Escrow Accounts for Principal and Interest

Lenders must now establish escrow accounts for property taxes and homeowners insurance on all first mortgage loans. That means the full mortgage payment will include not only principal and interest, but also taxes and insurance (PITI).

Up to now, most lenders required escrow accounts only when the buyer put down less than a 15-20% down payment. This provision won't be phased in until 2010, but it's probably a better approach to paying these housing costs than the gamble many homeowners use. Homeowners will have these costs spread out over 12 monthly payments rather than struggling to pay large insurance and tax bills in one lump sum; this should make the monthly cost of home ownership more self-evident before the loan closes.

Where to Find More Information

Additional highlights of the final Federal Reserve rules that amend the home mortgage provisions of Regulation Z (Truth in Lending) can be found on the Federal Reserve website.

For more information on researching, choosing, and qualifying for an affordable mortgage, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart (Nolo).

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on San Diego real estate law or e-mail our San Diego legal firm at:  shaun.bosslaw@sbcglobal.net

Buying a Foreclosed Home: Pros and Cons

Republished with Permission © 2009 Nolo.

by Broderick Perkins

Learn about the risks associated with buying a foreclosed home at each stage of the foreclosure process.

Record levels of foreclosures hitting the market at the same time home prices are falling creates an enticing home-buying opportunity. Many people, in the hopes of getting a home at a rock bottom price, consider buying a foreclosed property.

But buying a foreclosed home is fraught with risks. Before you jump on the bandwagon, learn whether you are a good candidate to buy a foreclosed home as well as the risks and benefits of buying at each stage of the foreclosure process.

Should You Buy a Foreclosed Home?

Whether or not you should consider buying a foreclosed home depends on several factors, including your homeownership experience, your financial situation, and whether you have access to professionals with experience buying foreclosed properties. Ask yourself the following questions:

What is Your Home Ownership Experience?

Think hard about making a foreclosure purchase your first home buy. An existing or past home owner is usually better equipped to understand and manage the obstacles that come with buying a foreclosed home. That's because a typical, non-foreclosure home buying transaction provides lessons in the true cost (in time and money) of owning a home, beyond the monthly mortgage payment.

By owning a home, you also learn about financing, tax shelter issues, property maintenance, and home improvements. It also means you’re more likely to have access to a host of professionals to help you with a foreclosure deal.

How Solid is Your Financial Situation?

A foreclosure deal may be loaded with surprise expenses because foreclosed properties are often in disrepair. Such properties also can come with titles encumbered by judgments, liens, and other attachments you may have to pay off to seal the deal. And even before you begin to negotiate, the homework necessary to research the market and property can cost you. Finally, a surfeit of foreclosures typically signals a declining market with the inherent risk of property value declines yet to come. You should have the financial wherewithal to see you through to the next upturn.

Existing or prior home ownership can give you the equity stake you need to cover foreclosure purchase costs, provided you have a solid equity position available in your primary residence. Otherwise, some source of liquid cash to tap, along with low debt and outstanding credit, are all essential.

Do You Have Access to Experienced Professionals?

The arcane foreclosure system is populated with professionals who've learned the ropes. Unless you are likewise endowed with foreclosure acumen, get one or more experienced professionals on your side.

You'll need competent assistance from a real estate agent, attorney, investor, or other professional familiar with local laws and real estate market, specifically as they apply to your market's foreclosure system. Your point person should also have ample connections with other savvy professionals you may need on your quest, such as a home inspector, appraiser, and perhaps a general contractor.

Pros and Cons of Buying Foreclosed Properties

Even if all of the above factors line up in your favor, buying a foreclosed home is still rife with risk. The risks differ depending on what stage the foreclosure is in when you attempt to buy. When you buy a foreclosed property is as important as what property you buy.

Here are the pros and cons of buying a foreclosed home at each step in a typical foreclosure process.

Preforeclosure

Preforeclosure is the period after a home owner goes into default (typically when a payment is 90 days or more past due), and the lender files a public notice to that affect (Notice of Default or Lis Pendens ). You can find these notices in your local public records office or get them from the local newspaper, or on- and offline firms that track this data.

Pros. Experts say this is one of the best times to buy foreclosure properties. Here’s why:

Cons.  Here’s what to look out for in preforeclosure properties:

Foreclosure Auctions

Months after the buyer first defaults, if he or she doesn't bring the loan current, the lender attempts to auction off the property. Foreclosure auctions vary from state to state, but they are typically held on the courthouse steps, in a county office, at the foreclosed home, or some other location.

Pros. The auction can represent the highest potential return for an astute buyer who has done her homework, inspected the property, and verified the home's value. Here’s why:

Cons. The auction is where having professionals on your side is key. Auctions often attract hard core investors who have the cash to flip the property (sell within a short period for a profit) and others who've been around the foreclosure block a few times.

Here are some other disadvantages to buying foreclosed homes at auction:

Real Estate Owned (REO) Properties

Lenders repossess homes they can't auction off. The properties are called "Real Estate Owned" properties or "REO" properties for short.

Pros. Here are some of the advantages of buying an REO property:

Cons.  There are several big disadvantages to buying an REO property: price and dealing with the bank.

To learn more about all aspects of the home buying process, including buying foreclosed homes, fixer-uppers, and others, get Nolo’s Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart (Nolo).

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on San Diego real law or e-mail our San Diego legal firm at:  shaun.bosslaw@sbcglobal.net

Mold in the Home: What Homebuyers Need to Know

Republished with Permission © 2009 Nolo.

by Alayna Schroeder

Recognize potential mold problems before buying a house -- and get the seller’s full disclosure for mold problems you can’t see.

No one wants to buy a house with a mold problem. Unfortunately, mold problems are not always easy to detect. If you are looking to buy a home, learn how to detect mold in homes, get the seller to disclose mold issues, and remove mold if you decide to buy a home damaged by it.

Mold in the Home

Mold is a fungus that comes in various colors (black, white, green, or gray) and shapes. While some molds are visible and even odorous, mold can also grow between walls, under floors and ceilings, or in less accessible spots, such as basements and attics. Mold does best in water-soaked materials (paneling, wallboard, carpet, paint, ceiling tiles, and the like) but can survive in almost any damp location. Mold can grow in houses situated in the desert, and it can grow in homes in hot and humid climes.

Here are some common places in a home where mold is likely to take hold:

Besides presenting an ugly appearance and, sometimes, an unpleasant odor, mold can cause health problems. In the worst cases, a few types of molds produce mycotoxins, which can cause rashes, seizures, unusual bleeding, respiratory problems, and severe fatigue in some people. Fortunately, most molds are of the non-toxic variety.

How to Detect Mold

You won’t always know if there is mold in a house you’re considering buying, but you can take a few easy steps to try and find out.

Be on the lookout for mold. When you’re thinking about buying a home, look for the elements above to figure out if there are any obvious signs of mold or the potential for mold. Keep your eyes peeled for standing water in the basement, water marks on walls (particularly recent-looking stains), or musty smells (particularly in bathrooms, kitchens, laundry rooms, basements, cabinets with plumbing, or other areas with plumbing).

If you’re looking at a newer home, find out whether it is built with “synthetic stucco,” also called the Exterior Insulation and Finish System (EIFS). This airtight barrier is supposed to improve insulation, but if improperly installed, may allow water penetration and mold growth on the inside of walls.

Ask your home inspector. If you have the home professionally inspected before you buy it, your home inspector may see obvious signs of mold or water damage. While it’s not the inspector’s job to look for mold, most home inspectors will mention obvious signs of water damage and the possible presence of mold. And because the inspector will poke around in spaces you might not, he or she may see things you wouldn’t.

Don’t hesitate to ask whether the inspector saw signs of mold or potential mold dangers, and ask that these results be included in the inspection report. Some inspectors may be wary of this, because they want to avoid liability for any mold-related problems. But all should be comfortable talking to you about whether they saw anything suspicious.

Ask the seller to disclose any mold or water-related problems.  Some states require sellers to disclose information about mold (see “Required Seller Disclosures,” below). But that isn’t true everywhere. Even in states where mold disclosure is not required, you can still ask for such disclosure. In addition, ask questions about things that could lead to mold growth, such as “Have any pipes ever burst?” or “Have any of the windows ever leaked?”

Listen to agents and appraisers. In some states, real estate agents or brokers have a duty to disclose problems they know about. Likewise, an appraiser should notify you if he or she sees an obvious sign of a mold problem if it could affect the value of the property.

Required Seller Disclosures

Several states require sellers to reveal particular facts within their knowledge when they sell their homes. In some states, sellers must make disclosures about mold growth specifically. A quick visit to your state’s department of real estate should let you know what your state requires.  Again, even if your state doesn’t require the seller to make this disclosure, don’t hesitate to ask for it.

Keep in mind that the seller’s duty to disclose only relates to things the seller knows about or reasonably should know about -- he or she doesn’t have a duty to go poking around in the walls to see if there’s mold, for example. That’s another reason it’s a good idea to ask about potential mold-causing problems. The seller may know of these conditions without being able to confirm there’s actual mold growth.

Professional Mold Testing

Should you get an expert’s opinion? Unfortunately, unlike tests for lead paint, tests for mold are difficult to conduct and expensive. And according to the U.S. Environmental Protection Agency (EPA), testing for mold isn’t usually necessary when it’s visible on surfaces. Most people will end up relying on the detection methods discussed above.

However, if you suspect mold is present in the home, but none is visible, you might elect to hire a professional mold testing company. These companies test the air in and around the home. They can also dig into walls and take samples, which they later test in a laboratory. Testing the air usually costs several hundred dollars. If the company takes wall samples, the cost will be even higher.

You can use the results from mold testing in two ways when negotiating a home purchase:

How to Fix Mold Problems

Dealing with a mold problem is a two-step process. First, remove the mold itself, plus any parts of the structure (walls, carpets, and so on) that the mold has damaged. Second, take steps to discover and fix the source of the moisture.

Step One: Removing the Mold

Recent and relatively small mold growths can often be fairly easily removed by scrubbing with detergent and following up with a combination of bleach and water, then allowing the area to dry completely. (If a problem is really that easy, though, you may wonder why the seller didn’t just take care of it himself.) Be sure to wear protective gear and keep the area well ventilated.

If the problem has been festering for some time, or is inaccessible (within a wall, for instance) you may have to enlist the help of a professional contractor. The contractor may have to do some serious work, such as ripping up carpeting and subfloors or tearing down walls to access the mold. (Replacing these materials will add to the cost of remediation.)

Hiring a contractor to remove mold. Nowadays, many contractors and handymen claim they are mold detectors (ads such as  “Mold Busters” and “Got Mold?” are common). But don’t automatically hire a company that bills itself as a “professional mold detector” or “licensed mold remediator.” In fact, there are no legally-imposed standards or licenses for handling mold repairs (unlike removing lead paint and asbestos). To determine if a particular contractor is qualified to do mold removal, do some homework.

Step Two:  Removing the Cause of Mold Growth

The next step in your mold-riddance campaign is to find out where the moisture came from and stop its intrusion. If you don’t, the mold may simply regrow. Unfortunately, this part of the process can be expensive. Repairing a leaky roof, a basement prone to flooding, or a weak pipe behind a bathroom wall can be more expensive than removing the mold itself.

Should You Buy a House With Mold Problems?

If you find a house and discover it has mold problems, should you buy it anyway?  You’ll have to decide whether the cost of removing the mold and fixing the source -- both in time and money -- is worth the price you’ll pay. If you have an inspection contingency and the mold is revealed as part of the inspection, or if you have a specific mold contingency, you have a bargaining chip. You can ask the seller to reduce the asking price, to fix the problem, or you can choose to walk away from the deal.

For more practical homebuying tips, get Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart (Nolo).

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on San Diego real estate law or e-mail our San Diego legal firm at:  shaun.bosslaw@sbcglobal.net

Short Sales and Deeds in Lieu of Foreclosure

Republished with Permission © 2009 Nolo.

by Attorney Stephen R. Elias

A short sale or deed in lieu may help avoid foreclosure or a deficiency.

Many homeowners facing foreclosure determine that they just can’t afford to stay in their home. If you plan to give up your home but want to avoid foreclosure (including the negative blemish it will cause on your credit report), consider a short sale or a deed in lieu of foreclosure. These options allow you to sell or walk away from your home without incurring liability for a “deficiency.”

To learn about deficiencies, how short sales and deeds in lieu can help, and the advantages and disadvantages of each, read on.

Short Sale

In many states, lenders can sue homeowners even after the house is foreclosed on or sold, to recover for any remaining deficiency. A deficiency occurs when the amount you owe on the home loan is more than the proceeds from the sale (or auction) -- the difference between these two amounts is the amount of the deficiency.

In a “short sale” you get permission from the lender to sell your house for an amount that will not cover your loan (the sale price falls “short” of the amount you owe the lender). A short sale is beneficial if you live in a state that allows lenders to sue for a deficiency -- but only if you get your lender to agree (in writing) to let you off the hook.

If you live in a state that doesn’t allow a lender to sue you for a deficiency, you don’t need to arrange for a short sale. If the sale proceeds fall short of your loan, the lender can’t do anything about it.

How will a short sale help? The main benefit of a short sale is that you get out from under your mortgage without liability for the deficiency. You also avoid having a foreclosure or a bankruptcy on your credit record. The general thinking is that your credit won’t suffer as much as it would were you to let the foreclosure proceed or file for bankruptcy.

What are the drawbacks? You’ve got to have a bona fide offer from a buyer before you can find out whether or not the lender will go along with it. In a market where sales are hard to come by, this can be frustrating because you won’t know in advance what the lender is willing to settle for. 

What if you have more than one loan? If you have a second or third mortgage (or home equity loan or line of credit), those lenders must also agree to the short sale. Unfortunately, this is often impossible since those lenders won’t stand to gain anything from the short sale.

Beware of tax consequences. A short sale may generate an unwelcome surprise: Taxable income based on the amount the sale proceeds are short of what you owe (again, called the “deficiency”). The IRS treats forgiven debt as taxable income, subject to regular income tax. The good news is that there are some exceptions for the years 2007 to 2009. To learn more, see “Income Tax Liability in Short Sales and Deeds in Lieu,” below.

Deed in Lieu of Foreclosure

With a deed in lieu of foreclosure, you give your home to the lender (the “deed”) in exchange for the lender canceling the loan. The lender promises not to initiate foreclosure proceedings, and to terminate any existing foreclosure proceedings. Be sure that the lender agrees, in writing, to forgive any deficiency (the amount of the loan that isn’t covered by the sale proceeds) that remains after the house is sold.

Before the lender will accept a deed in lieu of foreclosure, it will probably require you to put your home on the market for a period of time (three months is typical). Banks would rather have you sell the house than have to sell it themselves.

Benefits to a deed in lieu. Many believe that a deed in lieu of foreclosure looks better on your credit report than does a foreclosure or bankruptcy. In addition, unlike in the short sale situation, you do not necessarily have to take responsibility for selling your house (you may end up simply handing over title and then letting the lender sell the house).

Disadvantages to a deed in lieu.  There are several downfalls to a deed in lieu. As with short sales, you probably cannot get a deed in lieu if you have second or third mortgages, home equity loans, or tax liens against your property.

In addition, getting a lender to accept a deed in lieu of foreclosure is difficult these days. Many lenders want cash, not real estate -- especially if they own hundreds of other foreclosed properties. On the other hand, the bank might think it better to accept a deed in lieu rather than incur foreclosure expenses.

Beware of tax consequences. As with short sales, a deed in lieu may generate unwelcome taxable income based on the amount of your “forgiven debt.”

Income Tax Liability in Short Sales and Deeds in Lieu

If your lender agrees to a short sale or to accept a deed in lieu, you might have to pay income tax on any resulting deficiency. In the case of a short sale, the deficiency would be in cash and in the case of a deed in lieu, in equity.

Here is the IRS’s theory on why you owe tax on the deficiency: When you first got the loan, you didn’t owe taxes on it because you were obligated to pay the loan back (it was not a “gift”). However, when you didn’t pay the loan back and the debt was forgiven, the amount that was forgiven became “income” on which you owe tax.

The IRS learns of the deficiency when the lender sends it an IRS Form 1099C, which reports the forgiven debt as income to you.

No tax liability for some loans secured by your primary home. In the past, homeowners using short sales or deeds in lieu were required to pay tax on the amount of the forgiven debt. However, the new Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) changes this for certain loans during the 2007, 2008, and 2009 tax years only.

The new law provides tax relief if your deficiency stems from the sale of your primary residence (the home that you live in). Here are the rules:

The insolvency exception to tax liability. If you don’t qualify for an exception under the Mortgage Forgiveness Debt Relief Act, you might still qualify for tax relief. If you can prove you were legally insolvent at the time of the short sale, you won’t be liable for paying tax on the deficiency.

Legal insolvency occurs when your total debts are greater than the value of your total assets (your assets are the equity in your real estate and personal property). To use the insolvency exclusion, you’ll have to prove to the satisfaction of the IRS that your debts exceeded the value of your assets.

Bankruptcy to avoid tax liability. You can also get rid of this kind of tax liability by filing for Chapter 7 or Chapter 13 bankruptcy, if you file before escrow closes. Of course, if you are going to file for bankruptcy anyway, there isn’t much point in doing the short sale or deed in lieu of, because any benefit to your credit rating created by the short sale will be wiped out by the bankruptcy.

To learn more about short sales and deeds in lieu, including when these options might be right for you, get The Foreclosure Survival Guide, by attorney Stephen Elias (Nolo).

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on San Diego real estate law or e-mail our San Diego legal firm at:  shaun.bosslaw@sbcglobal.net

Mortgage Refinancing to Avoid Foreclosure: The HOPE for Homeowners Act

Republished with Permission © 2009 Nolo.

by Attorney Stephen R. Elias

The HOPE for Homeowners Act helps owners at risk of foreclosure to refinance their mortgages.

In July 2008, the federal HOPE for Homeowners Act was enacted. This Act created a program designed to help homeowners who are considered to be at risk for foreclosure. Homeowners who qualify will be able to refinance their currently unaffordable variable rate mortgages into affordable 30-year fixed rate mortgages insured by the Federal Housing Administration (FHA), if their lenders agree to participate.

Overall, this new program will support the refinancing of loans up to an aggregate value of $300 billion. The government estimates that between 300,000 to 400,000 homes may be saved from foreclosure through this program. However, the government’s estimates may be premature – a number of unresolved factors make it tough to accurately predict how effective the program will be.

Lender Agreement Is Voluntary

The biggest unknown factor in the success of this program arises from the fact that lenders aren't obligated to participate. For it to work as intended, lenders must be willing to accept buyouts of their loans that will provide the lender with 90% or less of the current appraised value of the home.

Here’s how this would work:

Megan and Preston own a home that is currently appraised at $350,000. They bought the home for $500,000 and owe $480,000 on a variable rate loan. They'd like to take advantage of the HOPE for Homeowners program and convert their mortgage into an FHA insured 30-year fixed rate mortgage. In order to do this, their lender must agree to cash out the $480,000 mortgage for 90% of the home’s appraised value, or $315,000, which is less than two thirds of the mortgage debt.

The lawmakers who passed this bill are betting that lenders will agree to participate rather than pay the steep price typically associated with foreclosures. But here are some reasons that this incentive may not always work:

Subordinate Lender Agreement Is Voluntary

In order for the refinancing program to work, not only the primary lenders, but also the holders of second or third mortgages, will have to sign off on the deal – and there’s nothing forcing them to do so. They're only likely to take this step if:

The authors of the Act recognized that getting subordinate mortgage holders to agree to the refinanced loan will often be difficult. To facilitate agreement, the FHA oversight board will coordinate negotiations between the original mortgage holder and the subordinate mortgage holders. Still, if the subordinate mortgage holders have to accept pennies on the dollar (if that), they can simply say "no" to the refinancing.

Future Home Appreciation Must Be Shared With Feds and Lenders

Homeowners who receive refinancing under the HOPE for Homeowners program will be required to share a portion of any future appreciation in home value with the federal government. In other words, if you sell or refinance your home, you may have to send some of the profits to the feds.

The amount will range from 100% to 50%, depending on when the property is sold or refinanced. In addition, any second or third mortgage holder that agrees to the refinance at a loss to itself may be entitled to share in the appreciation, depending on a number of factors to be developed by the FHA oversight board.

Who Will Qualify for the Program

Not everyone will qualify for refinancing under this program. The final details of who will and won’t qualify are yet to be determined. The statute itself provides some core eligibility rules, but the new FHA governing board will need to issue standards for the implementation of these rules, including the ultimate criteria for deciding who qualifies and who doesn’t.

Here are the main requirements provided by the Act itself.

The homeowner must be “at risk” of foreclosure. The HOPE for Homeowners program is designed for people who are at risk of foreclosure. The Act uses the “debt-to-income ratio” method to determine who is at risk. That means your monthly mortgage debt load would need to have been at least 31% of your monthly gross income as of March 1, 2008.

Example:   As of March 1, 2008, Ben had a monthly mortgage debt of $2,000. He would need a monthly gross income of less than $6,500 to hit the 31% debt to income ratio. If Ben’s income were $8,000 a month, his mortgage debt-to-income ratio would be 25% and he would not qualify for the program.

The Act provides that the FHA’s newly created oversight board may set an even higher debt-to-income ratio, meaning that the number of borrowers considered “at risk” may ultimately be smaller than originally set forth by the Act itself.

Proof of income. To participate in this program, you will have to produce income tax returns for the previous two years, in addition to other documentation of your income. Your income will have to be adequate to make the new loan affordable under standards set out in the National Housing Act (essentially debt-to-income ratios). (

Primary residence. You must be living in your primary residence to qualify for refinancing under this program. Also, you can’t own any other real estate. Homeowners who also own second homes or rental properties are out of luck.

Virtue counts. To obtain refinancing under this program, you must certify under penalty of perjury that:

The goal of the certification is to separate the sincere and innocent homeowners from those who played fast and loose with the home-financing system during the boom years, and to weed out people who deliberately put themselves into a position to qualify for the new refinancing program.

But, despite the best intentions of Congress, this certification process probably won’t disqualify you from the program even if you acted somewhat recklessly when financing your home. There is no provision for a case-by-case assessment of an applicant’s past virtue. Also, of course, one’s person’s recklessness is another person’s lifeline for medical treatment or a source for mortgage payments because of a lost job.

Getting Help From a Nonprofit Housing Counselor

The U.S. Department of Housing and Urban Development (HUD) has certified a national network of nonprofit housing counselors for the purpose of providing homeowners with accurate information at little or no cost regarding their mortgage difficulties. These counselors can be counted on to understand the ins and outs of the HOPE for Homeowners Program. For a list of these counselors, see HUD’s website at www.hud.gov  (click on “Avoid Foreclosure” under the Homes column) or call 1-800-569-4287.

If you believe that you're at risk of defaulting on your mortgage payments, you should immediately contact one of these counselors to discuss your options -- both under the new Act and under existing techniques for avoiding foreclosures. 

To learn how to survive or even prevent foreclosure, get The Foreclosure Survival Guide, by Stephen Elias (Nolo).

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on San Diego real estate law or e-mail our San Diego legal office at:  shaun.bosslaw@sbcglobal.net

Defenses to Foreclosure

Republished with Permission © 2009 Nolo.

by Attorney Stephen R. Elias

Challenge a foreclosure by bringing a defense such as unconscionability or lender mistake.

Until recently, successful defenses against foreclosure were relatively rare. But that is changing rapidly -- more homeowners are successfully challenging foreclosure actions.

This sea change is due, in large part, to the unearthing of more and more evidence that the real estate industry has been rife with fraudulent and predatory lending practices. Because of this evidence, courts that once rubber-stamped foreclosure actions are now beginning to shift their sympathies towards homeowners.

Homeowners and their attorneys are taking advantage of this change in judicial attitude, and challenging foreclosure actions in many different ways. Here’s a review of some of the most common defenses to foreclosure, and how to raise them in court.

How to Raise a Defense to Foreclosure

In order to raise a defense to the foreclosure action, you must bring the issue before a judge. This is automatic in about half the states, where foreclosures are typically accomplished through civil lawsuits and judicial foreclosure orders.

In the other states, foreclosures typically take place outside of court (these are called non-judicial foreclosures) and you have no automatic means to mount a legal challenge. To have your defenses ruled on by a judge in these states, you have to file a lawsuit alleging that the foreclosure is illegal for some reason and asking the court to put the foreclosure on hold -- pending the court’s review of the case.

Common Foreclosure Defenses

As courts are increasingly sympathetic to challenges to foreclosure actions, attorneys across the country are raising many different types of defenses. Below is a description of the most common of these.

The Terms of the Mortgage Are Unconscionable

Over the years, attorneys have used a branch of law called “equity” to come up with a panoply of approaches to defending against foreclosure. The equity branch of law focuses on fairness in situations where a legal statute doesn’t provide adequate relief. It usually isn’t enough to simply claim that the foreclosure is unfair; rather, you have to come up with a specific justification for your position that has previously been recognized by the courts.

One such justification is a principle known as unconscionability -- that is, the terms of your mortgage, or the circumstances surrounding it, are so unfair that they “shock the conscience of the judge.” In one case where this defense was successful the borrower spoke very little English, was pressured to agree to a loan that he obviously couldn’t repay, was not represented by an attorney, and was unaware of the harsh terms attached to the loan (such as an unaffordable balloon payment ).

You Are a Servicemember on Active Duty

If you’re on active military duty, the Servicemembers Civil Relief Act (SCRA) provides you with special protections. Most importantly, if you took out your mortgage before you were on active duty, your foreclosure must take place in court even if foreclosures in your state customarily occur outside of court. If a foreclosure is initiated while you’re on active duty, you can automatically receive a nine-month postponement of the proceeding by requesting it from the court in writing. 

The Foreclosing Party Didn’t Follow State Procedures

In some cases, the foreclosing party doesn’t follow state procedural requirements for bringing a foreclosure action (for example, it fails to properly serve on you a Notice of Default required by state law). If this happens, you may be able to challenge the foreclosure. If your challenge is successful, the court will issue an order requiring the foreclosing party to start over.

Virtually all judges will overlook errors that are inconsequential, such as the misspelling of a name. Similarly, if the foreclosing party’s error doesn’t actually cause you any harm, it may not be worth fighting over. More serious violations will get a more serious response from the court.

The Foreclosing Party Can’t Prove It Owns the Mortgage

In federal courts (where some large lenders prefer to bring their foreclosure actions), only the mortgage holder (the owner or someone acting on the owner’s behalf) may bring the action. If your mortgage, like many, has been sold and bought by many different banks, lenders, and investors, proving just who owns it can be difficult for the last holder in the chain.

Though state courts are usually looser than federal courts about who can bring a foreclosure action, appropriate documentation of who owns the mortgage must nevertheless be presented, and this is often difficult for the foreclosing party to do.

The Mortgage Servicer Made a Serious Mistake

Mortgage servicers (entities who contract with banks and other lenders to receive and disburse mortgage payments and enforce the terms of the mortgage) make mistakes all the time when they’re dealing with borrowers. A study by law professor Katherine M. Porter showed that in 1,700 Chapter 13 bankruptcy cases, a majority of the claims submitted by mortgage owners had errors. (Misbehavior and Mistake in Bankruptcy Mortgage Claims, Texas Law Review 2008.) 

You may be able to challenge the foreclosure based on mistakes such as:

Mistakes on the amount you must pay to reinstate your mortgage are especially serious. This is because an overstated amount may deprive you of the main remedy available to keep your home. For example, if the mortgage holder says you owe $4,500 to reinstate (perhaps because it imposes unreasonable costs and fees), when in fact you owe only $3,000, you may not have been able to take advantage of reinstatement (say you could have afforded $3,000, but not $4,500).

The Original Lender Engaged in Unfair Lending Practices

You may be able to fight your foreclosure by proving that your lender violated a federal or state law designed to protect borrowers from illegal lending practices. Two federal laws protect against unfair lending practices associated with residential mortgages and loans: the Truth in Lending Act (TILA) and an amendment to TILA commonly termed the Home Ownership and Equity Protection Act (HOEPA). TILA applies to all loans. HOEPA only applies to “high cost” loans -- certain loans that have an unusually high interest rate or that come with unusually high up-front processing fees.

Lenders violate TILA when they don’t make certain disclosures in the mortgage documents, including the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and more.

In the case of loans covered by HOEPA, lenders must comply with various notice provisions and are prohibited from using certain mortgage terms, such as balloon payments in loans with terms of less than five years.

The right to rescind the loan. TILA and HOEPA provide a number of remedies for the borrower if these laws are violated. However, the key remedy in foreclosure actions is the borrower’s ability to retroactively cancel or rescind the loan. This is referred to as the right to an “extended rescission.” Unfortunately, the right to an extended rescission under these federal laws applies only if the loan is a second or third mortgage that you used for purposes other than buying or building your home (for instance you used it to pay off your unsecured credit card debt). Also, the violation must be considered “material” (that is, significant or substantial).

State-law remedies for “high-cost” loans. A few states have special protections for people facing foreclosure on “high-cost” mortgages. If your state is one of these, and the lender has violated any of its provisions, you might be able to raise that violation as a defense in your foreclosure case.

To learn more about these defenses, and other ways to avoid foreclosure, get The Foreclosure Survival Guide, by Stephen Elias (Nolo).

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on San Diego real estate law or e-mail our San Diego legal firm at: shaun.bosslaw@sbcglobal.net

Don’t Lose Your Home to Foreclosure “Rescue” Scammers

Republished with Permission © 2009 Nolo.

Foreclosure “rescue” scammers steal your home, equity, and money. Here’s how to protect yourself.

As record numbers of homeowners are defaulting on mortgages and are at risk of foreclosure, foreclosure rescue scammers are coming out of the woodwork in droves. These people and companies pretend to help homeowners facing foreclosure, but instead steal homes, equity, and money -- leaving the former homeowner in a more desperate financial state than before.

Don’t become the latest victim of these scams. Learn how the scams work, what the scammers are like, and how to protect yourself.

More Foreclosures Bring More “Rescue” Scams

Due to the current credit crunch and less-than-careful lending practices by banks, more people are having trouble paying their mortgage. And because the housing market is in a slump, it’s harder for homeowners in financial distress to sell their home (the sale price often doesn’t cover the mortgage) or refinance on better terms. The result is a dramatic increase in the number of people facing foreclosure.

Enter the scammers. Foreclosure “rescue” is rampant for some very good reasons:

How Do the Scams Work?

The methods scammers use to rip off homeowners are extremely varied. But most of them fit into three broad categories.

1. Sale-Leaseback Scams

In these schemes, foreclosure scammers prey upon the overarching desire of many homeowners -- to stay in their home. The foreclosure scammer tells the victim that the scammer will buy the house so that the mortgage is up to date and the homeowner can rent the home indefinitely and then buy the home back from the scammer. Unfortunately, the rent payments and buyback provisions are usually so onerous that homeowners can never buy the home back.

2. Charging High Fees for Little or No Services

Some foreclosure scammers pretend they are legitimate foreclosure consultants (to learn more about legitimate consultants, see "Protect Yourself: How to Avoid Foreclosure Scams," below) and then exploit the homeowner’s trust by:

These schemes cause the homeowner to lose much-needed money. Worse, because the homeowner believes the foreclosure “consultant” is handling the situation, the homeowner does nothing during the crucial time period when action must be taken. By the time the homeowner realizes he has been scammed, it is too late to get current on the loan, negotiate with the lender, sell the house, or find effective assistance.

3. Stealing the Home Without the Homeowner’s Knowledge

In these schemes, the foreclosure scammer gets the homeowner to unwittingly surrender ownership of the home. Often, the foreclosure consultant promises that he will bring the mortgage up to date and allow the homeowner to stay in the home, setting up a payment plan for the homeowner to pay him back. The victim doesn’t realize that the home has actually been sold to the scammer (usually at a ridiculously low price) and ends up paying extremely high rent to stay in the home.

Sometimes, the homeowner believes she is merely signing new loan documents to bring the mortgage current, but instead is signing title over to the scammer. Or the scammer may simply forge the homeowners’ signature on documents.

Profile of a Scammer: What to Look For

The people and companies that prey upon homeowners in foreclosure use many tactics to gain the homeowner’s trust. Here are some examples:

Protect Yourself: How to Avoid Foreclosure Scams

If you are having financial troubles, believe you may lose your home, or are in foreclosure, here’s how you can make sure that you do not become a victim of a foreclosure scam.

Stay in touch with your mortgage lender. Contrary to what a foreclosure scammer will tell you, you should contact your lender the minute you have trouble paying. Often, you can refinance or restructure the loan. Keep contacting your lender during the mortgage workout or foreclosure process.

Get full information about the foreclosure process. Your best offense in saving your home, and your best defense in preventing scams, is to learn about and understand the foreclosure process. Get full information about the process in your state, understand all deadlines for responding to documents from the court and lenders, and be sure you know at which point in the process you can lose the legal right to own your home.

Seek help from a legitimate foreclosure counseling agency. Get help from a HUD-approved Housing Counseling Agency (see HUD’s website at www.hud.gov or call 800-569-4287) or from a counselor certified by the National Foundation for Credit Counseling (www.nfcc.org).

Check state laws governing foreclosure consultants. Many states have laws that specify what foreclosure consultants can and cannot do, what must be included in the contract for services, and require the consultant to provide the homeowner with a three- or five-day right to cancel the contract (meaning if you change your mind within a few days, you can get out of the deal). If a foreclosure consultant hasn’t complied with your state's laws governing foreclosure consultants, go elsewhere -- it’s a red flag that the consultant is either incompetent or not above-board. (On the flip side, just because a consultant complies with all of these laws doesn’t mean he’s not a scammer.)

Never make a verbal agreement. Always get everything in writing.

Read and understand everything before signing any document. Have a lawyer, financial professional, or trusted friend or relative review the documents too. This is especially true if you are transferring title to your home to someone. Never sign a blank page or a document with blank lines.

Use your own translator. If you don’t speak English, use your own translator. Don’t rely on the translator provided by the company or organization helping you.

What to Do If You Think You’ve Been Scammed

If you think you’ve been scammed by someone before or during the foreclosure of your home, get help immediately. You may still have time to save your home. Or, you may be able to sue the scammer to recover your home or some of your lost money. Contact a lawyer, a HUD-approved Housing Counseling Agency, or a counselor certified by the National Foundation for Credit Counseling (contact information is listed above.)

Be sure to report suspected fraud to local and state authorities. Authorities may be able to help in your individual case. And even if they can’t help you, your complaint may lead to a criminal investigation (especially if others have complained against the same scammer).To report possible fraud, contact your state attorney general’s office, the state district attorney, the Better Business Bureau (www.bbb.org), the state department of real estate, the Federal Trade Commission (www.ftc.gov), or a lawyer .

For more information on the foreclosure process, obtaining reputable credit counseling services, and pulling yourself out of debt, read Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom, by Robin Leonard, J.D., and attorney John Lamb (Nolo).

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on San Diego real estate law or e-mail our San Diego legal firm at:  shaun.bosslaw@sbcglobal.net

Mortgage Modification and Refinancing Under the Homeowner Affordability and Stability Plan

Republished with Permission © 2009 Nolo.

by Attorney Stephen R. Elias

Refinance or reduce your mortgage payments under Obama's plan, meant to slow down foreclosures.

The Homeowner Affordability and Stability Plan, signed into law in February 2009, should allow many more people to stay in their houses and avoid foreclosure. If your loan is owned or controlled by Freddie Mac or Fannie Mae, you have a decent shot at refinancing your mortgage into a fixed-rate, low-interest loan if you are current on your current mortgage and aren’t too “upside down” on the property. And regardless of who owns your mortgage, if you are at risk of foreclosure and have suffered a change of circumstances beyond your control, you may be able to get your monthly mortgage payments reduced, and suspend any foreclosure proceedings during the process

The Making Home Affordable Program under the Homeowner Affordability and Stability Plan has two components: a $400 billion refinance program and a $75 billion mortgage modification program.

The Refinance Program

The refinance program, officially called the Home Affordable Refinance Program, will potentially transform millions of Fannie Mae and Freddie Mac loans into stable, 15- or 30-year fixed-rate, low-interest mortgages. Payments under the refinanced loans may increase in some cases, if the homeowner can afford them. The tradeoff for higher payments in the short term is that the amounts will be stable in the long term -- no more worrying over interest rate resets. The refinance program applies only to mortgages owned or backed by Fannie Mae and Freddie Mac -- about half of the nation’s mortgages. Overall, the program is bound to significantly help decrease the mortgage default rate and stabilize home prices.

To qualify for a refinance of a Fannie Mae and Freddie Mac loan under this program, you have to be current on your mortgage and have good credit, and the house to be refinanced must be your principal residence. Even then, you won’t get a new loan if you are more than 5% upside down on your house, meaning that you owe more than the house is worth. For example, if your home is worth $200,000, you won’t get the loan if you owe $210,000 or more on your mortgage. Unfortunately, homeowners in areas hit heavily by the foreclosure crisis are typically as much as 25% upside down -- for example, they owe $250,000 or more on a $200,000 house.

The Mortgage Payment Reduction Program

The mortgage payment reduction component of the Homeowner Affordability and Stability Plan provides a workable way for all lenders to make mortgages more affordable in the short term by modifying the terms of the mortgage. It’s too soon to tell whether or not the number of homeowners benefiting from this program, officially called the Home Affordable Modification Program, will be in the millions as predicted by the Administration, but the total number is sure to be large.

You qualify for this program if all of the following are true:

  • Your loan is equal to or less than $729,751.
  • The mortgage is on your principal residence.
  • You are at risk of foreclosure, either because you have missed at least two payments or because your payments on your first mortgage exceed 31% of your gross income.
  • You’ve experienced a financial hardship caused by a change of circumstances, such as loss of a job, medical emergency, or interest-rate reset.
  • You can show (by way of a tax return and wage stubs) that you have enough steady income to make the payments under a modified loan.

To get the process started, mortgage servicers will perform a “net present value” (NPV) analysis on all loans in their portfolios that are either at least two months delinquent or that are at “imminent risk” of default. (Mortgage servicers are the middlemen between the lender and the borrower, though some lenders service their own mortgages.) Although the guidelines don’t define what “imminent risk of default” means, it probably means loans with a debt-to-income ratio greater than 31%. A loan’s NPV is what it would cost (in cash flow) to modify the mortgage compared to the cost of taking the property through foreclosure and selling it. Based on prior experience, many NPV analyses are likely to show that it would cost the lender more to foreclose than to modify the loan. If that’s true in your case, the mortgagor servicer will be required to notify you, enter into modification discussions, and modify the mortgage under the program’s guidelines if you meet the eligibility requirements. If an NPV analysis shows that the lender would not save money by offering you a modification rather than foreclosing, the lender still has the option of offering you a loan modification under the program’s guideline.

The modification program’s ultimate goal is to adjust the interest rate and possibly the duration of your mortgage so that your debt-to-income ratio will be no higher than 31%. In other words, your payment on your first mortgage, including taxes and insurance, will be no more than 31% of your gross income. Your debt-to-income ratio won’t include payments on a second mortgage on your house, installment payments on a car or other secured property, or mortgages on other houses you happen to own.

To get to the 31% debt-to-income goal, a lender will first reduce the interest rate to as low as 2% (for five years), and, if necessary, extend the term of the loan to a maximum of 40 years (from its inception). Using this process, the lender reduces your payments to a debt-to-income of 38%. After that point, the government will share equally in the cost of the rest of the reduction down to 31%.

Example: Your gross income is $8,000 per month, and your mortgage payment (including interest and insurance) is $3,400. That means you’re spending about 42.5% of your income on housing. Reducing your interest rate by about 2% would get your mortgage payment down to $3,000, giving you a debt-to-income of about 38%. Up to this point, the entire cost of the modification would fall on your lender. However, to further lower your payments to 31% of your debt-to-income ratio, the government and the lender would share equally in the cost. To bring your debt-to-income ratio down to 31%, or a mortgage payment of approximately $2,500, the lender would lower your interest rate all the way down to a minimum of 2%, and if necessary, increase your mortgage term beyond 30 years. The government would pay for half of the reduction in the monthly mortgage payment from a 38% to a 31% debt-to-income ratio. Mission accomplished.

Servicers can also modify a mortgage loan by reducing its principal or delaying payment on part of the principal until the end of the loan. It’s more likely, though, that the servicer will change interest rates and the length of the loan rather than forgive or forbear any principal.

Under the guidelines for the mortgage modification program, foreclosure proceedings must be suspended during the time that you are engaged in the modification process until the end of the three-month trial period during which you are making your new payments on your modified mortgage -- assuming you are successful in obtaining one.

You can see a summary of the program at www.treasury.gov. The guidelines themselves are found at www.treas.gov/press/releases/reports/modification_program_guidelines.pdf.

Incentives for Lenders and Mortgage Servicers

Participation in the mortgage modification program by mortgage servicers is voluntary, but most of the big ones have already indicated their willingness to play along. One reason: The program provides monetary incentives to servicers for keeping people in their homes and to lenders for agreeing to modify the mortgage. (The incentives make it less likely that a servicer would make more money off a foreclosure than it would modifying your mortgage to the 31% debt-to-income level.) Note that once a mortgage servicer accepts any federal “bailout” money, its participation in this program is mandatory.

The program also includes incentives for mortgage servicers who are able to extinguish second liens (second mortgages, for example) on the property. Extinguishing second liens will make mortgages more affordable, improve loan performance, and help prevent foreclosures.

Starting the Modification Process

Your mortgage servicer is supposed to contact you if you appear to be eligible for the program, though there is no guarantee this will happen. Before contacting your lender, it’s a good idea to talk to a nonprofit housing counselor certified by the Department of Housing and Urban Development (HUD) about your options. To find a free counselor, call 888-995-HOPE or go to www.hud.gov and click on Foreclosure Avoidance Counseling.

Don’t Pay for Modification Assistance

Under no circumstances should you pay anyone to help you with your mortgage modification. According to promotional materials that have come my way, a bevy of mortgage brokers are being retrained to negotiate mortgage modifications, charging $1,000 and up for the same services you can get for free from a HUD-certified housing counselor. Because laws in some states prohibit people from taking money up front to help rescue people from foreclosures, some of these modification companies are hiring lawyers -- who are authorized to accept up-front payments -- to be their pitch persons. Lawyers can be helpful in certain situations--for instance, you may want to hire a lawyer to challenge a foreclosure in court or to help you file for bankruptcy--but lawyers have no magic keys to the kingdom of mortgage modifications. Again, you and your wallet will be better off with a free HUD-certified counselor.

Weigh Your Options

Before signing off on any new mortgage terms, ask yourself whether you would be better off holding on to your house or walking away. If you can get a lower payment under the new laws, you may be more inclined to keep your house, but it may depend on just how big a reduction you can get and whether your negative equity is so large that it makes more sense to use your state’s foreclosure laws as a means to put away some money. In other words, even if you qualify for a monthly reduction in payments of several hundred dollars, you might be better off allowing your house to be foreclosed on -- by not paying your mortgage altogether, you could save thousands of dollars during what is often a very slow foreclosure process. If you decide that it’s in your best interest to walk away from your mortgage, but you want to stay in the house as long as possible payment free, the only effect the new laws are likely to have is to lengthen the time you can stay before you have to leave. That’s because mortgage lenders must suspend foreclosure proceedings during the processing period (and because they will be busy negotiating modification terms with other homeowners, making them less efficient in bringing foreclosure actions).

For more information on these and other ways to avoid or delay a foreclosure, see Foreclosure Survival Guide: Keep Your House or Walk Away With Money in Your Pocket, by Attorney Stephen R. Elias (Nolo).

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on San Diego real estate law or e-mail our San Diego legal firm at:  shaun.bosslaw@sbcglobal.net

Foreclosure FAQ

Republished with Permission © 2009 Nolo.


Avoid or delay foreclosure with short sales, deeds in lieu of foreclosure, bankruptcy, and other tactics.

What's Below:

Will my bank negotiate with me or lower my rate so I can avoid foreclosure?

Can I sell my house for less than I owe on my mortgage (short sale)?

Can bankruptcy stop a foreclosure?

What is a deed in lieu of foreclosure?

What happens to renters when a property is foreclosed on?

Are there foreclosure protections for military personnel?

Will my bank negotiate with me or lower my rate so I can avoid foreclosure?

Your lender may modify your loan if you have an adjustable rate mortgage or if you are several months behind on your mortgage. Call and ask to speak to your lender’s loan modification or loss mitigation department. The lender may accept partial payments for a few months (though you may have to agree to make up the difference later), accept a late payment, or agree to modify the terms of your loan.

There are several plans offered by the federal government to help homeowners avoid foreclosures, including FHASecure and Hope for Homeowners. The most recent program to be announced is the Homeowner Affordability and Stability Plan, which is aimed at helping homeowners refinance their mortgages to lower their mortgage payments. Homeowners might qualify for a refinance at a 15- or 30-year fixed-market-interest-rate (currently around 5%).

This plan would ease the rules so that homeowners whose loans are owned or guaranteed by the Fannie Mae and Freddie Mac could have a chance to refinance even if they have little or no equity in their home. A separate part of the plan would bring mortgage payments down for some homeowners to a total of 31% of their gross income. Both parts of the plan would apply only to homeowners with conforming loans.

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Can I sell my house for less than I owe on my mortgage (short sale)?

If the sales price you are offered falls short of the amount you owe the lender -- called a "short sale" -- you need to get permission from your lender. This is because in most states, technically a lender is allowed to sue you after the house is sold (or foreclosed on) to recover any remaining deficiency -- the difference between the sales price and what you owe on the mortgage. In most cases, however, a lender is not likely to sue for a deficiency.

If you live in a state that doesn’t allow a lender to sue you for a deficiency, you don’t need to arrange for a short sale. In this case, if the sale proceeds fall short of your loan, the lender can’t do anything about it.

Short sales usually aren't possible if there is a second mortgage, unless the same lender owns both loans. Also, some homeowners may be better off letting a foreclosure take place, saving a few month's mortgage payments until it happens. 

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on on short sales or San Diego real estate law.  E-mail our San Diego legal offices at:  shaun.bosslaw@sbcglobal.net.

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Can bankruptcy stop a foreclosure?

Bankruptcy can delay a foreclosure, but won’t stop it permanently. Here’s how it works: When you file bankruptcy, the court automatically issues an "automatic stay." The automatic stay directs your creditors to cease all collection activities and foreclosures immediately. If your home is scheduled for a foreclosure sale, the sale will be postponed while the bankruptcy is pending -- typically for three to four months.

However, if your lender obtains the bankruptcy court's permission to proceed with the sale (by filing a "motion to lift the stay"), the sale may be allowed to go forward after a couple of months. But during a Chapter 7 bankruptcy, you can live in your home for free for several months while your bankruptcy is pending. You can then use that money to help secure new shelter. 

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on on foreclosure or San Diego real estate law.  E-mail our San Diego legal offices at:  shaun.bosslaw@sbcglobal.net.

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What is a deed in lieu of foreclosure?

With a deed in lieu of foreclosure, you give your home to the lender (the "deed"), and in exchange, the lender cancels the loan rather than foreclosing on the property. In most states, a lender is allowed to sue you to recover any remaining deficiency—the difference between what the lender can sell the house for and what you owed on the mortgage. Before you agree to a deed in lieu of foreclosure, make sure that the lender agrees, in writing, to forgive any deficiency that exists. Deeds in lieu of foreclosure are not possible if there is a second mortgage, unless the same lender owns both loans. 

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on on foreclosure or San Diego real estate law.  E-mail our San Diego legal offices at:  shaun.bosslaw@sbcglobal.net.

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What happens to renters when a property is foreclosed on?

Most renters will lose their leases upon foreclosure. The rule in most states is that if the mortgage was recorded before the lease was signed, the lease will be wiped out when a foreclosure occurs. That doesn't mean a renter will have to leave immediately -- but those who remain in the rental join the ranks of month-to-month renters, all of whom can be terminated with proper notice -- usually 30 days, but 60 days in California. The new owner (usually the lender) may or may not move quickly to terminate the rental. 

Contact Shaun Boss at www.sandiegolegalfirm.com for more information on on foreclosure or San Diego real estate law.  E-mail our San Diego legal offices at:  shaun.bosslaw@sbcglobal.net.

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Are there foreclosure protections for military personnel?

A mortgage lender can't foreclose on a house owned by military personnel on active duty unless the lender seeks special permission from the court.

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Contact Shaun Boss at www.sandiegolegalfirm.com for more information on San Diego real estate law or e-mail our San Diego legal office at:  shaun.bosslaw@sbcglobal.net.