FORECLOSURE AND DEFICIENCY JUDGMENTS IN MONTANA
DISCLAIMER: The following general information cannot be relied upon as legal advice. Please consult an attorney or other appropriate professional to advise you about your specific situation.
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Home loans in Montana are usually secured by either a mortgage or a trust indenture, sometimes called a Deed of Trust.
In most instances the loan is made to the homeowner who then grants a security interest in the home or promissory note to the lender to guarantee re-payment.
Most often loans are for the purpose of purchasing a home. These types of loans are secured by a first trust indenture or first mortgage. This type of loan and security arrangement is sometimes called a purchase money mortgage or purchase money trust indenture.
Loans can also be for other purposes and can be secured by the homeowner’s equity in the home. This type of loan is usually called a home equity line of credit and is often secured by a second mortgage or second trust indenture.
If the homeowner defaults on the obligations of the promissory note or security instrument, or both, then the holder of the secured promissory note may foreclose.
A mortgage can only be foreclosed in Montana by filing a lawsuit in court.
A trust indenture can be foreclosed either as a mortgage (by filing a lawsuit) or by a trustee’s sale.
If a foreclosure lawsuit is filed then the complaint and summons must be served upon the homeowner. This can be done by delivering them to the homeowner personally. If the homeowner cannot be served personally then the summons may be published in a local newspaper of general circulation.
If the homeowner has legal or factual defenses, then those most be stated in a written answer and filed with the court.
If there is no valid legal or factual defense then a decree of foreclosure of the mortgage may be signed by the judge. The judge will order the home to be sold by the sheriff of the county where it is located. A notice of sheriff’s sale will be given and the sheriff will conduct a public auction for cash. The proceeds are applied to the costs of the sale, the costs and fees of the lawsuit, and repayment of the loan.
The homeowner and other interested persons (such as other secured creditors) have the right to buy the home back from the successful bidder at the sheriff’s sale within one year by paying the amount that was bid plus interest and other expenses of maintaining the property. This is called a right of redemption.
A trust indenture can be foreclosed as a mortgage by filing a lawsuit. But most commonly a trust indenture is foreclosed by the trustee conducting a public auction sale. The trustee must give notice to the homeowner and publish notice in a local newspaper of general circulation at least 120 days before the sale occurs.
The trustee’s sale is for cash and is final. There is no right of redemption.
The trustee distributes the proceeds of the sale to the holder of the secured promissory note and then any excess proceeds to other persons who are entitled to receive payment. If the trustee cannot determine who should receive the excess sale proceeds, then the money is deposited with the county clerk and recorder.
If the proceeds of the trustee’s sale are not sufficient to pay the full amount owned, the holder of the secured promissory note is not entitled to any deficiency owed on a purchase money loan for a personal residence.
A holder of a secured promissory note can only recover a deficiency amount by means of a lawsuit.
If the loan was not to purchase the home, such as a home equity line of credit, then the holder of the secured promissory note may be entitled to collect the deficiency from the homeowner. Or if the property was intended to be and was used for commercial purposes, or mixed personal and commercial use, then the holder of the secured promissory note may be entitled to collect a deficiency from the homeowner.
If a second mortgage or trust indenture is destroyed by the foreclosure by another secured creditor of a first mortgage or first trust indenture, then the holder of that second mortgage or trust indenture may file a lawsuit to collect the unsecured promissory note.
The holder of the secured promissory note may agree to allow a sale of the home for less than is owed. This is called a short sale. If there is a second mortgage or second trust indenture, the holder of the secured note must also agree to the sale. Usually the holder of the first mortgage or first trust indenture agrees to accept the sale proceeds in full satisfaction of the loan and so there is no deficiency. If there is not such an agreement by all interested parties, then the homeowner usually has no incentive to complete the short sale.
As each homeowner’s situation can be different, it is advisable for any homeowner to visit with their legal counsel or other appropriate financial professional.
SHORT SALE vs. FORECLOSURE
What is affected?
Credit Score:
With a Short Sale: When a home is sold via a short sale the credit bureau will only reflect late payments (if there were any) and will usually affect the credit score much less than a foreclosure. If you continue to pay on all of your other payments during the short sale process your score may only be affected around 50 points. There is no short sale reported on any credit report, rather, you may see a “settled for less than full balance” comment appear shortly thereafter.
With a foreclosure: Due to late payments and the “Foreclosure” appearing on your credit report it can drop your score more than 300 points. Usually all three credit scores will be adversely affected for up to four years. A foreclosure will remain as a public record forever and can remain on a credit report for up to 10 years.
Future employment:
With a Short Sale: Since a short sale is not reported on the credit bureau report, you will not encounter future employment risks.
With a foreclosure: Foreclosures can affect credit which can affect the following aspects of future employment. 1) Security clearance – can be taken away or not issued resulting in job loss or not getting a job in that particular field with those requirements. 2) Some employers pull credit reports and will terminate employees because of their derogatory credit. 3) Job applications – most employers pull credit reports during the application process. A foreclosure greatly affects ones credit score and standing as to hiring potential.
Fannie Mae Loans:
With a Short Sale: A borrower or investor who allows the subject property to be negotiated and sold through the short sale process will be eligible, in both cases, for a Fannie Mae backed mortgage after 2 years.
With a foreclosure: If this is your primary residence and your home is foreclosed upon you are ineligible for a Fannie Mae backed mortgage for a period of 5 years. If this is an investment property, it will be 7 years before you are eligible for a Fannie Mae loan.
New Loans:
With a short Sale: There is no section or question(s) on the application that ask about a short sale situation at this time. (4/2011)
With a foreclosure: Future loan rates will be affected if you allow your home to foreclose because you will have to check “yes” to Section VIII, question C on the 1003 Loan Application.
Cash for Keys vs. Relocation Assistance:
With a Short Sale: If you are approved for a short sale, you can receive up to $5000 for “relocation assistance”. Ask your corresponding broker or negotiator if you qualify.
With a foreclosure: During a foreclosure a homeowner or tenant may be given “cash for keys” which is a payoff to ensure that you do not strip the home of its contents and fixtures before they take it back. This normally amounts to around $1500.
Always consult with an attorney before you make any decisions in this process.