Process of Foreclosures
When a homeowner fails to make mortgage payments back to their lender, a home or property enters a legal process called foreclosure. When they do not make the agreed payments on time for a certain period, the bank has the ability to take the property back, essentially a home repossession.
This helps the bank or lender reduce losses on the loan. Nothing about foreclosure is quick or easy, in fact, it can be a long, difficult process. This article discusses the information you should know regarding a foreclosure, and how to purchase a foreclosed home.
What are Foreclosures?
Typically, homeowners need to apply for a loan when purchasing a home. Of course, there are some people with the financial means to simply purchase a property in cash. When a purchaser lacks the funds for purchasing their new home directly, it is common to get a loan from a credit union or bank to cover the part they cannot cover at the time. The loan is referred to as a mortgage, which is a legal agreement to repay the loan over a certain period. Slowly with each payment, the borrower becomes a full owner of the property once the mortgage is repaid.
In the event homeowners fail to make payments for an extended period, or simply stop paying their mortgage payments, the bank or lender is losing money. In addition to losing money, the lender is not earning on their investment through interest. Therefore, missed payments are the initial step in the foreclosure process. The entire process has four sections:
For the lender to begin a foreclosure process, the homeowner has to miss their mortgage payment. Generally, this can happen because of various reasons, but commonly due to a type of hardship, such as a job loss, divorce or death. Although, there are times when the homeowner stops paying for another reason, but it is usually because they simply cannot make the payment. Therefore, the foreclosure process begins.
The second part is defaulting on a loan. This refers to the homeowner not paying the mortgage payments for a minimum of 3 to 6 months. However, by law the lender is required to send the homeowner a notification of defaulting on the loan.
For example, placing a notice paper on the property’s front door.
Additionally, the lender is required to alert the government by filing for a Suit Pending letter or Notice of Default letter. With the Suit Pending letter, a homeowner has the ability to pay the amount of all missed payments and start making regular payments again, which dismisses the default.
Once filing a Notice of Default, the property enters pre-foreclosure. Lenders vary in how they handle these based on the local state laws. The pre-foreclosure happens within 30 to 120 days after the homeowner files a Notice of Default. Pre-foreclosure is essentially one last opportunity for the borrower to pay back the amount owed by the lender’s deadline, or sell the home.
During pre-foreclosure, banks often work with homeowners to help protect their credit and avoid full foreclosure through selling the property in a short sale, as approved by the bank. Although, if the homeowner has the ability to pay the excess owed to the lender, it will dismiss the foreclosure process.
Selling or Auctioning
In the event the home has not been sold before the agreed pre-foreclosure deadline, the bank retains ownership. At this point, there are two methods the bank uses to regain losses. They either list the home for sale or auction it off. Both of these are discussed further later.
Once the property is sold, the profits are collected by the bank, repaying the property lien. Although, this damages the homeowner’s credit, remaining on a credit report for 7 years (like bankruptcy).
Tips on Buying Foreclosures
It is common for individuals and investors to be interested in buying foreclosures. They are commonly sold well under market value, because the banks are trying to regain their initial investment and frequently sell for the amount owed. This amount is typically significantly less than the property value. Additionally, with effort and time the property value can increase.
Foreclosed homes can be purchased by two main ways:
When a foreclosed property is sold at auction, it’s generally referred to as a Trustee’s Sale. To learn about your local rules, regulations and auction times contact your state and/or city.
If the foreclosed home is listed with a Real Estate company, then it is referred to as Real Estate Owned.
Pre-Approved by Mortgage Company
The first step is to contact a mortgage company for pre-approval. You will be asked to show proof that you can afford at least a percentage of the property. They will provide a pre-approved amount which you can compare to the bank’s asking price.
There are no contingencies available, such as stating you will only purchase the foreclosed property upon your home selling. You need to be prepared to buy the property no matter the situation.
Deposit of Earnest Money
The deposit of earnest money shows the bank you are a serious buyer ready to secure the purchase. The larger your deposit, the better it will look, and lower your payments will be.
Compared to purchasing regular property, buying a foreclosure can be a longer process. In addition to needing a place to stay while buying the home, foreclosures typically need repairs. Depending on the condition of the foreclosure, you might have large repairs to fix prior to moving in, which can take time.
Property Sold As-Is
Be fully prepared to take on a property as-is. When foreclosed properties are auctioned, buyers are not usually allowed to view the inside or have an inspection done. Therefore, when buying foreclosed property at auction you’re often taking a leap of faith without knowing the extent of damage inside.
When purchasing a Real Estate Owned property, some banks might be a little flexible with the as-is contingency, agreeing to repair certain things prior to purchasing. However, this depends on the lender and their willingness to work with buyers.
If you plan on buying foreclosed property, be sure to include a home warranty for protecting appliance and systems. You never know when things will break down or appliances could break over time. These situations will result in repair costs without a home warranty. If you would like to save money when things break down, compare our pricing and plans here to determine how much you could save each month.