Illinois Hard Money Loan Guide
The Federal Reserve Bank shows a fairly sharp decline in Illinois home-ownership over the past few years. The Land of Lincoln was previously over 72% but since 2006 that number has fallen down to 65%. Much of that decline can be blamed on the national mortgage and housing crisis, but home sales are on the rise again. Many prospective home buyers in Illinois will look to alternative financing options instead of standard mortgage loans from a big bank. One option is to find a hard money loan. These are not offered by the large banks but instead can be found with smaller investment groups and individual real estate investors. A hard money loan can also be used to renovate an investment property. Hard money loans usually fund much quicker than a standard mortgage and require much less paperwork. That is because the buyer secures the loan by using their home or other owned real estate as collateral, reducing overall risk for the lender.
Illinois Foreclosure Laws
Illinois is a judicial foreclosure state. Foreclosures in Illinois are managed by the courts. A mortgage company or lender that decides to foreclose on a property must file a law suit and a court must issue a final judgment of foreclosure in order to take the property. There are clear steps in place to assure that a borrower is properly notified and that they have a chance to respond. But, if a final judgment of foreclosure is issued in Illinois, then the property is usually sold as part of a public noticed sale. A sheriff or judge within the county where the property is located will conduct the sale.
Property Redemption after Foreclosure Sale
In some states, borrowers have a standard period of time where it is possible to get their property back after a foreclosure sale has taken place. In Illinois, most borrowers have no rights of redemption after the sale is final. In some cases, if the lender purchases the home at the foreclosure sale and if the sale price was lower than the total amount owed, including principal, interest, fees and costs, it is possible for the borrower to get a special right of redemption within 30 days of the foreclosure sales, according state statute. (See 735 Ill. Comp. Stat. 5/15-1604(a)). Legal representation is highly encouraged as there is no guarantee that the property will be returned to the borrower, even with these circumstances in place.
In cases where a foreclosure property is sold in Illinois, but it does not bring in enough money to cover the debt, a borrower will be held responsible for any additional monies owed with what is called a deficiency judgment. If a borrower is assigned a deficiency judgment, they will have to make additional payments to the lender to take care of that remaining debt.
Deed in Lieu of Foreclosure
A Deed in Lieu of Foreclosure is one option that Illinois property owners have to remedy a defaulted loan. They do not keep the property, but they can avoid a foreclosure judgment. This is an agreement between the borrower and the lender that turns the property over to the lender and eliminates the potential of a deficiency judgment as well. If both parties agree, then the borrower simply gives the property deed to the lender, terminating the borrower"s ownership in the property. If the lender accepts the deed, they cannot try to get a deficiency judgment against the borrower for additional monies owed.
Another option in Illinois is a consent foreclosure. It is just another type of agreement between a borrower and lender that the state will acknowledge and honor. With this option, the court enters a judgment satisfying the mortgage by giving the lender absolute title to the property so that they can sell it themselves, instead of allowing the courts to sell it. The borrower has no rights of redemption after this type of foreclosure judgment and after the judgment has been rendered, the lender cannot file for a deficiency judgment. Borrowers in a consent foreclosure agreement are protected from owing additional monies on that loan.
Common Law Strict Foreclosure
Only a few U.S. states allow strict foreclosures; Illinois is one of them. Strict foreclosure is called "common law" because it is a method of foreclosure that has been used for many years but is not clearly written out in state laws. Strict foreclosure is an arrangement that is set when a loan is funded, not at the time of foreclosure. With strict foreclosure, the lender actually owns the property in question throughout the duration of the loan. The borrower makes payments on the loan and only after the total amount has been paid in full, ownership transfers to the borrower. In this kind of arrangement, if the borrower fails to pay, the lender has the right and ability to reclaim their property.
The strict foreclosure process is much faster for the lender. They are able to sell the property more easily, because they actually own it in the first place. In Illinois, the courts must be involved because it is a judiciary foreclosure state. But a strict foreclosure can happen very fast. Once a court rules in favor of a strict foreclosure, the judge will set a "law day" which gives the borrower a specific amount of time to pay off the debt. If they do not pay in time, the lender takes over the home and can sell it at will. In the case of a strict foreclosure, a lender can also pursue a deficiency judgment against the borrower for additional monies owed. There is no protection against this additional action in the case of a strict foreclosure.
Grace Period Notice
In the past, Illinois lenders were required to give borrowers a 90 day advanced warning of their intention to foreclose, in writing, called a Grace Period Notice. Borrowers could then sign up for special financial counseling and delay foreclosure proceedings for several months. That law changed in July of 2016 and lenders are no longer required to provide a Grace Period Notice in Illinois.
Protections for Military Personnel
Service members deployed to a combat or combat supporting post overseas within the 12 months leading up to a foreclosure notice can apply to the courts for a 90-day stay of foreclosure. Also any service member who has been in service for over 29 consecutive days, including a family member that resides at the service member's home, can file a motion with the court seeking relief from foreclosure proceedings. If their ability to pay the mortgage payments is materially affected by their military service, the courts have options, including a 90 day postponement of all foreclosure activities, and they have the option to reduce payments for the service member as well. (See 735 Ill. Comp. Stat. 5/15-1501.6)
High Risk Mortgage Protections
Following the recent mortgage crisis in America, federal and state laws were adjusted to build in special protections for people that may have been victims of predatory lending practices or who may have taken on a high risk mortgage without understanding what that might mean for their ability to pay the loan over time. As a result, Illinois has some special protections built-in for people holding those mortgage loans that are considered to be high risk.
Before a lender or bank can file a foreclosure action on a high risk home loan, they must send a notice that informs the borrower of their right to cure the default within 30 days. In addition, a borrower can raise violations of the high risk home loan law - including the prohibition of prepayment penalties and negative amortization - as a defense in a foreclosure action. In these cases, it is important to have experienced legal counsel in order to get the best outcome in your specific situation.
Do You Have a Mortgage or a Deed of Trust?
Illinois allows both. The differences between a mortgage and a deed of trust affects homeowners only when foreclosure becomes an issue. The primary difference is that a mortgage foreclosure must go through the courts. A Deed of Trust does not. However, because Illinois is a judiciary state, all foreclosure proceedings must go through the courts so the difference here is small. However, it is important to note that some lenders prefer Deed of Trust agreements versus a mortgage because a foreclosure is often faster and easier from their side of the process. If you are unsure about which one you have, look at your loan documents, contact your mortgage servicer or go to your local land records office to find out. In Illinois, a foreclosure will have to go through the courts, regardless of which type of loan agreement you have in place.
Additional State Laws
The maximum legal interest rate on a personal loan in Illinois is 9%. However, consumers often unknowingly agree to waive the limit and pay higher rates by clicking "I agree" online or by signing a contract that outlines a higher interest rate than is outlined by the law. While most states, including Illinois, have usury laws on the books that are meant to prevent unfair interest rates, most courts will defer to contract law over these simple statutes. That means that in Illinois, if you agree to a contract that has a higher interest rate, or additional points or fees to be paid, you are accepting that rate regardless of the state's current usury law. It is not illegal to charge a borrower fees, points or higher interest rates, if they agree to the terms of the contract in writing.
Illinois is a homestead state. This means that property owners can file their primary residence as a homestead and will enjoy some protections designed for homeowners to keep them from losing their house or property as a result of economic hardship. In most cases, this will keep their home off limits to creditors. However, there are four situations that are NOT protected, where a borrower can lose their property as a result of unpaid debt. In Illinois, those circumstances include:
- If past due taxes are owed to the State of Illinois; Illinois counties or municipalities
- If the home was used as collateral for credit in a mortgage (like a hard money loan)
- If money is owed to people that worked on the property (contractors, builders, etc)
- If there was a pre-existing lien on the property before it was claimed as a homestead
Lender Licensing Requirements
In Illinois, anyone engaged in the business of brokering, funding, originating, servicing or purchasing residential mortgage loans or residential real estate in the state, is required by law to hold a Residential Mortgage License issued by the state. It is easy to find out if a person or company is licensed by visiting the Illinois Department of Financial and Professional Regulation. (http://www.idfpr.com/Banks/RESFIN/MBB.asp)
Regulatory Investigations and Hard Money Legislation
In 2008, the FBI told authorities in Chicago and 23 other field divisions to prioritize mortgage fraud as an issue, calling it a "serious threat" affecting the community and financial institutions. Since that time, Chicago FBI mortgage fraud case load has more than doubled with investigations involving multimillion dollar losses. Anthony P. D'Angelo, Supervisory Special Agent in charge of Financial Crimes for the Chicago Field Division of the FBI said, "What we are trying to do is go after the big fish and hit all strata - attorneys, appraisers, accountants, hard money lenders, currency exchanges, developers and real estate agents - to make an impact on system fraud involving multiple people in huge financial losses" (http://www.illinoisrealtor.org/Member/publications/realtor/2008/November/fraud).