Iowa

Mortgage Foreclosures and Land Contract Forfeitures

Authored By: Iowa Legal Aid LSC Funded

 

People are usually not able to pay in full when they buy a home. As a result, most Iowans finance homes through either a mortgage or a land contract. If the buyer fails to make payments the loan terms require, each of these financing tools allows the lender to retake the home. The steps involved depend on whether it is a mortgage or land contract. The first part explains how mortgage and land contracts differ. It looks at the foreclosure process a lender must follow to get a home back if the borrower defaults on a mortgage agreement. Part two concerns the steps a lender must follow to forfeit a land contract.

Note: This information only deals with foreclosures and forfeitures through the courts. It concerns non-farm single family homes, and not land used for agriculture. When a farm or business goes through a foreclosure or forfeiture, different procedures may apply. Iowa law also allows a type of foreclosure that does not go through the courts. It is a voluntary process set forth in Iowa Code §654.18. This Legal Brief does not address that nonjudicial alternative.

Mortgages are usually through banks, credit unions and finance companies. To secure the loan, the lender takes a security interest or mortgage in the house and land. The mortgage must be in writing. Both the lender and the borrower must sign it. A separate written note goes with most mortgages. If the borrower does not make payments as required by the loan terms, the lender can start a process in court to get the home and land back. The legal proceeding to retake the house and land after a borrower defaults is called a foreclosure. A lender who successfully forecloses on the property becomes its new owner. Most often, the house and land are sold by the lender. Money from the sale is applied to the borrower’s unpaid loan balance.

Land contracts are usually between the buyer and the person selling the home. They may also be offered by banks and other lenders. Most buyers using land contracts are people who can’t get approval from a lender for a mortgage. In a land contract, the seller takes the role of the lender. Instead of lending cash to the buyer, the seller agrees to take monthly payments towards the purchase price of the home. Interest is usually charged on the unpaid balance of the purchase price. Like a mortgage, a land contract must usually be in writing. It must also be signed by the seller and the buyer. If the buyer fails to make payments required by the land contract, the seller can take legal action to regain ownership of the house and land. The legal action to regain ownership is called a forfeiture. The foreclosure process can also be used.

Note: A land contract must have certain written provisions to be enforced by the forfeiture process. A buyer who finds out that the seller is trying to forfeit the land contract should have a lawyer look at the land contract to make sure it complies with Iowa law.

Mortgage Foreclosures

When a borrower fails to make payments as required by the terms of the mortgage, the lender can choose to start a foreclosure action to get the home and land back. It should be noted that other events can start a foreclosure. The process may begin if the borrower violates any other condition of the mortgage. For example, the buyer may fail to keep the property in good repair. A borrower might sell the property to someone without prior approval from the lender. Chapter 654 of the Iowa Code governs mortgage foreclosures. The Iowa Code can be found at your county courthouse, or at most local libraries. It is also on the Internet on the Iowa Legislature?s website: www.legis.state.ia.us/Code.html

What Actions Must the Lender Take Prior to Filing a Foreclosure?
A lender who believes the borrower is violating the mortgage terms (called a default) has to follow specific steps. Iowa Code §654.2D requires the lender to give the borrower a "notice of right to cure" before filing a foreclosure action in court. Iowa Code §654.2B says the notice of right to cure must meet these requirements:

  1. It must be in writing;
  2. It must state the name, address, and telephone number of the creditor or other person to which payment must be made;
  3. It must briefly identify the obligation secured by the mortgage;
  4. It must advise the borrower of his or her right to cure the default;
  5. It must state the nature of the alleged default;
  6. If the default is for failure to pay amounts owed under the mortgage, it must state the total payment due to cure the default, including an itemization of any late charges;
  7. If the default is for some other reason besides nonpayment, the notice must state what action is necessary to cure the default;
  8. It must state the date by which the amount must be paid or the specified actions performed;
  9. It must state that if the borrower does not cure the alleged default by the specified date, the lender or a person acting for the lender is entitled to file a foreclosure action in court.

A borrower who gets a thirty-day notice of right to cure should contact a lawyer right away for legal advice on how to cure the alleged default. The borrower has thirty days from the date of the notice to cure the default. If the borrower cures the default within the thirty-day time period, the borrower can continue with the mortgage as if he or she were not in default. On the other hand, if the borrower fails to cure the default within thirty days of the notice of right to cure, the lender can accelerate the mortgage. The lender can declare that the entire unpaid loan balance is due. The lender is only required to serve a thirty-day notice to cure once per year. If the borrower cures a default and commits the same default again within one year of a notice of right to cure, the lender can initiate foreclosure proceedings without serving another notice of right to cure. A lender’s failure to give the borrower a proper notice of right to cure is not always a defense to a foreclosure action. The borrower has to show that he or she was harmed by the creditor’s failure to serve a proper notice of right to cure prior to filing the foreclosure action.

How is the Foreclosure Action Handled in Court?
If the borrower fails to cure the default, the lender can start a foreclosure proceeding. The first step is filing a written petition in Iowa District Court. The foreclosure action must be filed in the county where the land is located. The borrower must be served a copy of the petition. Most often, service is by the county sheriff. After getting the petition, the borrower has twenty days to respond. He or she needs to file an appearance, motion or answer with the clerk of court. The borrower should state any defenses he or she has. The response should ask for a court hearing prior to the entry of a judgment. A borrower who is served a foreclosure petition should contact a lawyer right away for legal advice on the foreclosure process and any defenses to the foreclosure.


If the petition states that the lender has elected foreclosure without redemption, then the sale of the property can take place immediately and the borrower can be forced out of the house at the time of sale. To get more time, the borrower should file a written demand to delay the sale of the home with the clerk of court. This will delay the sale of the home should the court enter a judgment of foreclosure. If the lender has not waived a deficiency in the petition, asking for a delay of sale may allow the lender to obtain a deficiency judgment against the borrower.

If the borrower files an appearance, motion or answer within the twenty-day time limit and requests a court hearing, a hearing must be held before the foreclosure is completed. The borrower will get notice of the date and time of the court hearing if the borrower put his or her address on the appearance, motion or answer. If the borrower raises a successful defense to the foreclosure, the court may dismiss the foreclosure action. If the borrower does not succeed in raising a defense, the court will issue a foreclosure judgment. The judgment will award the lender title to the borrower’s home.

A borrower who fails to respond within the twenty-day time limit is in default. This puts the person in danger of having a judgment of foreclosure entered against him or her by the court without a hearing. Before requesting a default judgment, the lender must send the borrower a written ten-day notice of default to the address where the borrower was served. The ten-day notice of default advises the borrower that he or she has failed to file any kind of written response to the petition with the clerk of court. The notice also advises the borrower that unless he or she files a response to the petition within ten days of the date on the default notice, the court will enter a foreclosure judgment without a hearing. The judgment will award the lender title to the borrower’s home.

What Happens After the Court Enters a Judgment of Foreclosure?
When the court enters a foreclosure judgment, it also enters a money judgment for the entire amount due. The amount due can include the lender’s attorney’s fees. The court will enter an order directing the mortgaged property to be sold to satisfy the judgment, including interest and court costs. The sale of the property is held promptly after entry of a foreclosure judgment. Proceeds from the sale are applied to the money judgment. This may not cover the total amount. If the lender has not waived a deficiency judgment, the borrower may be personally liable for the unpaid amount still due. The borrower can delay the sale of the house only by filing a written demand to delay the sale with the clerk of court at any time prior to the entry of the foreclosure judgment.

If a borrower files a demand to delay the sale, the sale of the property is delayed. Then the borrower has a certain period from the date of the judgment to redeem the property. "Redeem" means to regain ownership. The borrower can redeem by paying the lender the amount demanded in the petition before the end of the redemption period. Most of the time, the "redemption period" is twelve months from the date of the foreclosure judgment. It can be sooner than that. If the lender includes a provision in the petition waiving any deficiency judgment against the borrower, the redemption period is shortened to six months after the foreclosure judgment. If the lender wants to shorten the redemption period to six months by waiving a deficiency judgment, the lender must include a special notice with the petition. The notice must advise the borrower that the lender is waiving the deficiency judgment and shortening the redemption period. If the borrower redeems the property before the redemption period, the judgment is satisfied and the property is not sold. The borrower regains ownership of the house and can continue to live in it.

The borrower can usually live in the house during the redemption period. If the lender allows the borrower to live in the house during the redemption period, the borrower is responsible for care of the house and not damaging it. The borrower may also have to pay rent to the lender during this time. If the borrower fails to redeem the property by the end of the redemption period, a date is set for a sheriff’s sale. The sale must be by public auction. It must take place between nine o’clock in the morning and four o’clock in the afternoon. Notice must be posted in three public places, including the county courthouse, at least four weeks before the sale date. Notice must also be published twice in the newspaper. If the borrower is living in the property, the sheriff must serve a notice of the sale to the borrower at least twenty days in advance. The borrower can go to the sheriff’s sale and bid on the property. The sheriff shall sell the property to the highest bidder. If the property sells for more than the amount owed, the surplus must be paid to the borrower.

After sale of the property, the only way to remove the borrower from the property is by court order. However, many foreclosure orders already contain that order so no further court action is necessary. In some cases, an eviction action must be filed against the borrower. Certain written notices must be given before the eviction action. Details on eviction procedures are in Iowa Legal Aid’s booklet A Guide to Landlord Tenant Law in Iowa. Contact any Iowa Legal Aid office to request a copy. Booklets are free to persons eligible for legal help from the program and others may purchase Iowa Legal Aid’s printed material.

FORFEITURE OF A LAND CONTRACT

This section explains what a lender must do to forfeit a land contract. This Legal Brief is about land contract forfeitures of single, non-farm, family residences. Forfeitures of agricultural and commercial properties may involve different steps than this Legal Brief covers.

Note: A land contract must have certain written provisions to be enforced by the forfeiture process. A buyer who finds out that the seller is trying to forfeit the land contract should have a lawyer look at the land contract to make sure it complies with Iowa law.

As explained earlier, if a buyer fails to make the payments that the terms of the land contract require, then the seller can start a forfeiture action to get ownership of the home and land. A forfeiture can also be started if the buyer violates any other condition of the land contract. For example, the buyer might fail to keep the property in good repair. He or she may sell the property to someone else without prior approval from the lender, etc. Chapter 656 of the Iowa Code governs forfeitures of land contracts. You can find the Iowa Code at your county courthouse or most local libraries. You can also go to the legislature’s website: www.legis.state.ia.us/Code.html

What Actions Must the Seller Take Prior to Forfeiting a Land Contract?
If the seller believes the buyer is violating the land contract’s terms, this is called a default. Iowa Code §656.2 requires the lender to give the borrower a thirty-day written "Notice of Forfeiture of Real Estate Contract" before the seller can forfeit the land contract. Iowa Code §656.2 says the notice of forfeiture must meet all of the requirements below.

  1. It must be in writing.
  2. It must reasonably identify the contract and accurately describe the real estate covered.
  3. It must say with which terms of the contract the buyer has failed to perform.
  4. It must state that unless, within thirty (30) days of getting the notice, the buyer performs the specified actions and pays the reasonable cost of serving the notice, the contract will be forfeited.
  5. It must state the amount of attorney fees claimed by the seller and state that payment of the attorney fees is not required to comply with the notice and prevent forfeiture.
  6. A copy of the written forfeiture notice must be served on the person in possession of the property if that person is different from the buyer.

There are two ways to serve the forfeiture notice. It can be done in person or by printing the forfeiture notice in the newspaper. A seller must get a judge’s permission to publish the forfeiture notice in the newspaper. To get a judge’s permission to publish the forfeiture notice, the seller must show the judge that the seller has been unable to serve the notice on the buyer in person.

A buyer who gets a thirty-day notice of forfeiture should contact a lawyer right away for legal advice on what to do to cure the alleged default. The buyer has only thirty (30) days from the date of the notice to cure the default. If the buyer cures the default within the thirty-day time period, the borrower can continue with the land contract as if he or she were not in default. On the other hand, if the buyer fails to cure the default within thirty days of the notice of forfeiture, the seller automatically regains ownership of the property and is entitled to keep all of the buyer’s payments. If the buyer cures a default and commits the same default again, the seller is required to serve the buyer with another written forfeiture notice which gives the buyer another thirty (30) days to correct the default. A seller’s failure to strictly comply with the forfeiture process may be a defense to the forfeiture action.

What Happens After a Forfeiture of a Land Contract?
If the buyer fails to cure the default, the seller automatically regains ownership of the property without any need of filing a court action. The seller will usually file an "Affidavit of Forfeiture" with the county recorder to change the county records to reflect the new ownership. Upon the successful completion of a forfeiture, the buyer becomes a "tenant at will" and is in danger of being evicted if the contract permits that. The seller can start an eviction by first serving the buyer with a "three-day notice to quit." The three-day notice to quit notifies the buyer that unless the buyer vacates the property within three days, the seller will file an eviction action. The eviction action is handled in the same manner as an eviction from a rental property, with certain exceptions. Details on eviction procedures are the booklet A Guide to Landlord Tenant Law in Iowa. Contact Iowa Legal Aid to get a copy.

Does a Buyer Have Any Defense to an Eviction following Forfeiture of a Land Contract?
A buyer who believes that the seller has incorrectly forfeited a land contract can file an answer to the eviction petition which raises the issue of ownership of the property (also known as "title"). If the buyer raises the issue of title, the Iowa District Court must handle the case, rather than Small Claims court. If the buyer can show that the land contract does not adequately specify a remedy of forfeiture, or that no default in the contract occurred, the buyer may be able to defeat the forfeiture action and regain ownership of the property. In a forfeiture for nonpayment of the monthly installments, the court may cancel the forfeiture if the buyer has paid a substantial part of the purchase price, and brings the total amount of missed payments to the court hearing. However, this is not guaranteed.

A buyer who wants to contest a forfeiture of a land contract should contact a lawyer as soon as the buyer gets a written notice of forfeiture. This allows the lawyer to provide the best legal help to the buyer, and may avoid a court action entirely. Helping low-income Iowans with housing issues and consumer issues are priorities of Iowa legal Aid. If you need a lawyer but can’t afford one, call Iowa Legal Aid at 1-800-532-1275.

Last review 9/21/12

This information is not a substitute for legal advice