According to the Federal Reserve Bank, homeownership in Tennessee is down from over 72% in 2005 to just over 65% in 2017. The housing and foreclosure crisis hit Memphis, Nashville and other areas hard, but there are signs that things may be turning around for the Volunteer state. Many people in Tennessee seek out hard money loans to help with purchasing or renovating an investment property or to find an alternative to borrowing from a standard lending institution. Hard money loans often fund much faster than a typical loan offered by a bank or mortgage lender and they can also require less paperwork. If a property owner is willing to use their home or other real estate as collateral, these loans are a popular way to go. Below you will find information about laws, borrower protections, lending regulations and other key issues specifically related to borrowing money for property in the state of Tennessee.
Foreclosure Laws in Tennessee
Most foreclosures in Tennessee are non-judicial, meaning that the process happens outside of the court system. Some states require a judicial process where the lender files a lawsuit in court. Tennessee does not require judicial foreclosure but lenders from larger banks sometimes use the judicial process because that is just how their company manages these issues across all states. There are strict guidelines with both options, requiring that a homeowner be notified of actions to foreclose on a property. But, with a non-judicial foreclosure, the process moves much faster and the requirements do not provide as much time for the borrower to catch-up on payments in order to save their home.
Notice of Sale
In Tennessee, the lenders seeking a foreclosure must post an official notice of sale in the local newspaper and provide the homeowner with a copy of the notice by the time that notice appears. It has to be published at least 20 days before the actual sale of the property occur. The lender also has the option to post the notice of sale in multiple public places 30 days before the sale, in cases where there is no local newspaper.
Is it Possible to Reinstate the Loan Before a Foreclosure Sale
In some cases, homeowners in default, meaning they have fallen behind on their payments, might have the chance to bring their payments up to date and the lender will allow for reinstatement. That means they can stay in the home if they continue to make the payments on time and the loan agreement continues going forward. These arrangements are managed by communicating with the lender and following instructions for catching up without missing due dates. However, most mortgage agreements in Tennessee do not allow for reinstatement. For homeowners that do not have the option to reinstate written in their mortgage agreement, the lender is not required to accept payments or special arrangements.
Special Protections Might Delay or Stop A Foreclosure Sale for High-Cost Loans
In Tennessee, there are some legal protections in place to help homeowners who might have fallen behind on what is known as a High Cost loan. These are mortgages that have a particularly high interest rate or where the loan is considered sub-prime; one where the loan was given to a borrower with a negative credit history. In these cases, a lender is required to send a Notice of Right to Cure (the right to catch up on payments) at least 30 days before posting the public notice of foreclosure. The homeowner is then allowed to reinstate at any time up to three business days before the sale of the property. To do that, they have to pay the full amount due to the lender for past payments. This special protection can only be used by a borrower one time in any 12-month period.
Property Redemption after Foreclosure Sale
Tennessee is one of a handful of states that does allow for property redemption after the foreclosure sale. Meaning, even if the home has been sold at auction, the borrower still might have the ability to regain possession of the home for up to two years after that sale. However, many Tennessee borrowers sign a deed of trust agreement when they first purchase the home, waiving this right to redemption.
Sometimes when a home is sold in foreclosure, the money that comes from that sale is not enough to cover what was owed by the borrower. In Tennessee, the lender can get what is called a deficiency judgment that requires the homeowner that lost the property to make payments toward the remaining balance. This is a judgment handed down by the courts and the lender must go through the courts to get it, but it is available to them whether a foreclosure was managed in or out of the court system.
The amount of the deficiency judgment will generally be the difference between the total debt and the foreclosure sale price. However, if the borrower proves that the property sold for an amount materially less than fair market value at the foreclosure sale, then the deficiency judgment will be limited to the total debt minus the fair market value of the property at the time of the sale (Tenn. Code Ann. § 35-5-118).
Deed in Lieu of Foreclosure
Sometimes a lender and borrower can work out an agreement called a Deed in Lieu of Foreclosure. The state of Tennessee allows this kind of agreement where a homeowner can simply turn over possession of the property to the lender and the two part ways or “call it even”. The lender must also agree to the terms but this kind of arrangement can save both parties the time and cost of a full foreclosure process and in some cases, it is possible to negotiate a “cash for keys” settlement where the lender provides a small cash payment to help offset the cost of moving out in return for the easier, less costly process.
Grace Period Notice
Tennessee law does not provide a borrower with a right to cure the default and reinstate the loan before the sale (unless the loan is a high-cost home loan), but the loan contract itself may provide this right.
Protections for Military Personnel
Under Tennessee law, if a member of a reserve or Tennessee National Guard unit entered into a mortgage or deed of trust to purchase a home, and the person is subsequently called into active military service outside the United States during hostilities, the lender may not foreclose until 90 days following the person's return to Tennessee. (Tenn. Code Ann. § 26-1-111.)
Additional State Laws
Tennessee is a Deed of Trust State. This means that most mortgage agreements contain language that grant the lender the option to pursue foreclosure outside of the court system. Because of this, Tennessee has a very fast foreclosure process compared to many other states. If a homeowner falls behind, it is important to reach out to the lender and try to make an arrangement to get caught up before any foreclosure action can begin. Once it starts, the timeline is set in place and it becomes much more difficult to save the property from forfeit.
The maximum legal interest rate in Tennessee is 10%. Most states have laws limiting the interest rates a creditor may charge, but consumers usually consent to higher rates by agreeing to the terms of the loan (thus waiving statutory interest rate limits). The legal rate and judgment rate of interest is 10%. The general usury limit is 24%, or four points above the average prime loan rate, whichever is less.
Tennessee is a homestead state. Under the Tennessee exemption system, homeowners may exempt up to $5,000 of their home or other property covered by the homestead exemption which is a principal place of residence. Joint owners of property, such as married couples, may claim up to $7,500 on property used as their principal place of residence.
An individual who has one or more minor children as dependents in the household may claim up to $25,000 on property owned by the individual and used as a principal place of residence. An unmarried individual who is 62 years of age or older may claim up to $12,500 on property used as his or her principal place of residence. A married couple, one of whom is 62 years of age or older and the other is younger than 62 years may claim up to $20,000 on property used as their principal place of residence. A married couple, both of whom are 62 years of age or older may claim up to $25,000 on property used as their principal place of residence.
Lender Licensing Requirements
This license is required of "(A) an individual who for compensation or gain or in the expectation of compensation or gain: (i) takes a residential mortgage loan application; or (ii) offers or negotiates terms of a residential mortgage loan. (B) But, does not include an individual engaged solely as a loan processor or underwriter for a registrant, unless that individual is an independent contractor and not an employee."
Legal Issues in Tennessee for Hard Money