If you get a loan to buy residential real estate in Vermont, you'll likely sign two documents: a promissory note and a mortgage. The promissory note is the document that contains your promise to repay the loan along with the repayment terms. The mortgage is the document that gives the lender a security interest in the property. If you fail to make the payments, the mortgage provides the lender with the right to sell the home at a foreclosure sale to recoup the money it loaned you.
Vermont law specifies how foreclosures work, and both federal and state laws give you rights and protections throughout the process.
If you miss a payment, the servicer can usually charge a late fee after the grace period expires. Most mortgage loans give a grace period of ten to fifteen days, for example, before you'll incur late charges. To find out the grace period in your situation and the amount of the late fee, review the promissory note or your monthly billing statement.
If you miss a few mortgage payments, the servicer will probably send letters and call you to try to collect. Federal mortgage servicing laws require the servicer to contact you (or attempt to contact you) by phone to discuss foreclosure alternatives—called "loss mitigation" options—no later than 36 days after a missed payment and again within 36 days after each following missed payment. No more than 45 days after a missed payment, the servicer must let you know in writing about loss mitigation options that could be available, and assign personnel to help you. Some exceptions to a few of these requirements exist, like if you file for bankruptcy or tell the servicer not to contact you under the Fair Debt Collection Practices Act. (12 C.F.R. § 1024.39).
Many Vermont mortgages have a provision that requires the lender to send a breach letter if you fall behind in payments. This notice tells you that the loan is in default. If you don't cure the default, the lender can accelerate the loan (call it due) and go ahead with the foreclosure.
Federal law generally requires the servicer to wait until the loan is over 120 days delinquent before officially starting a foreclosure. But in a few situations, like if you violate a due-on-sale clause or if the servicer is joining the foreclosure action of a superior or subordinate lienholder, the foreclosure can begin sooner. (12 C.F.R. § 1024.41).
Foreclosures in Vermont go through either what's called a "foreclosure by judicial sale" or a "strict foreclosure" process. With both types of foreclosure, the lender files a lawsuit in state court.
In a foreclosure by judicial sale, the court issues a judgment and orders the home sold to satisfy the debt. In a strict foreclosure, the court gives the property directly to the foreclosing lender without a foreclosure sale. Strict foreclosure is allowed if the court finds that the value of the property is less than the amount of the mortgage debt. (In layman's terms, the home is "underwater.") (Vt. Stat. Ann. tit. 12, § 4941).
In both a foreclosure by judicial sale and strict foreclosure, the lender begins the process by filing a complaint with the court and serving it to the borrower along with a summons. The summons will tell you how long you have to file an answer with the court, generally 21 days. (Vt. R. Civ. P. 12(a)(1)(A)).
In a foreclosure by judicial sale, the lender must also mail a notice of sale to the borrower no fewer than 30 days before the sale date and publish the notice in a newspaper. (Vt. Stat. Ann. tit. 12, § 4952). With a strict foreclosure, a notice of sale isn't necessary because no sale is held.
In a foreclosure by judicial sale, the process ends with a foreclosure sale. The lender usually makes a bid on the property using what's called a "credit bid" rather than bidding cash. With a credit bid, the lender gets a credit up to the amount of the borrower's debt. The highest bidder at the sale becomes the new owner of the property.
Again, with a strict foreclosure, the court gives title to the home directly to the lender without a foreclosure sale.
"Reinstating" is when you catch up on the missed payments, plus fees and costs, to stop a foreclosure. Under Vermont law, you can reinstate in a foreclosure by judicial sale after the expiration of the redemption period set forth in the judgment, but prior to sale, if both you and the lender agree to it. (Vt. Stat. Ann. tit. 12, § 4948).
The terms of the mortgage contract might also give you the right to reinstate the loan by a specific deadline.
Sometimes, a foreclosure sale doesn't bring in enough money to pay off the full amount owed on the loan. The difference between the sale price and the total debt is called a "deficiency balance." Many states, including Vermont, allow the lender to get a personal judgment, called a "deficiency judgment," for this amount against the borrower.
In a foreclosure by judicial sale, the lender may request a deficiency judgment in the foreclosure complaint, and the deficiency is waived if not requested prior to the confirmation order. (Vt. Stat. Ann. tit. 12, § 4954(d)). If the lender buys the home at the foreclosure sale, the deficiency amount is limited to the difference between the fair market value of the home and the total amount of the debt, plus expenses. (Vt. R. Civ. P. 80.1).
The lender can get a deficiency judgment, which is limited by the fair market value of the property, by filing a separate lawsuit.
Some states have a law that gives a foreclosed homeowner time after the foreclosure sale to redeem the property. In Vermont, the redemption period is before the sale in a foreclosure by judicial sale, and after the foreclosure decree in a strict foreclosure.
In a foreclosure by judicial sale, if the property is owner-occupied, you can redeem your home within six months from the date of the foreclosure decree, unless the court orders a shorter time. (Vt. Stat. Ann. tit. 12, § 4946). The sale takes place once the redemption period expires. You can also redeem up to the sale. (Vt. Stat. Ann. tit. 12, § 4949). You can't, however, redeem the home after the sale.
In a strict foreclosure, you may redeem the property within six months from the date of the foreclosure decree, unless the court orders a shorter period of redemption, or you and the foreclosing lender mutually agree to a shorter period. (Vt. Stat. Ann. tit. 12, § 4941).
If you don't redeem the home, the court will issue a writ of possession. The writ of possession has the same force and effect and is executed in the same manner as a similar writ issued after an ejectment (eviction) proceeding. (Vt. Stat. Ann. tit. 12, §§ 4941, 4946).
Foreclosure laws are complicated. Servicers and lenders sometimes make errors or forget steps. If you think your servicer or lender failed to complete a required step, made a mistake, or violated state or federal foreclosure laws, you might have a defense that could force a restart to the foreclosure or you might have leverage to work out an alternative. Consider talking to a local foreclosure attorney or legal aid office to learn about your rights. A lawyer can also tell you about different ways to avoid foreclosure. Likewise, a HUD-approved housing counselor can provide helpful information (at no cost) about various alternatives to foreclosure.