The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens. The foreclosure process can end one of four ways:
- The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.
- The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
- A third party buys the property at a public auction at the end of the pre-foreclosure period.
- The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure, via a short sale foreclosure or by buying back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).
• In the judicial procedure, a lender must prove that the mortgagor (borrower/homeowner) is in default. Once the lender has exhausted its attempts to resolve the default with the homeowner, the next step is to contact an attorney to pursue court action. The attorney contacts the mortgagor to try to resolve the default. If the mortgagor is unable to pay off the default, the attorney files a lis pendens (lawsuit pending) with the court. The lis pendens gives notice to the public that a pending action has been filed against the mortgagor. The purpose of the action is to provide evidence of a default and get the court’s approval to initiate foreclosure.
• Non-judicial foreclosures are based on deeds of trust that contain the power of sale clause. The clause enables the trustee to initiate a mortgage foreclosure sale without having to go to court. The trustee is typically required to issue a notice of default and notifies the trustor (borrower/homeowner) accordingly about the default status. If the trustor does not respond, the trustee then initiates the steps for conducting the mortgage foreclosure sale of the home.
Property owners who are late on their mortgage payments will receive a Notice of Default from their lender. Notices of default are filed with the local records authority. A Lis Pendens filing may also be filed to notify any other lien holders. The Notice of Default provides instructions to the homeowner on the amount they are required to pay and how much time they have to pay. If the homeowner pays according to these instructions, the foreclosure process is ended.
If the loan is not reinstated by the end of the pre-foreclosure period, the property will be sold at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction often offers the lender a way to quickly liquidate the property. The lender typically sets a minimum bid at foreclosure auction equal to the amount owed on the property plus fees and various costs to the lender.
• Bank Owned (REO)
Bank foreclosures can become government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case, the government agency would be responsible for selling the property.
Investors seek returns in several ways: buying cheap and flipping, making improvements, or renting for longer-term appreciation. Investors may buy homes directly from homeowners, at auction, or from lenders.
Properties in the foreclosure process must ultimately be bought or rented by ordinary consumers who plan to live in them. This may seem obvious, but the consumer is an extremely important piece of the foreclosure puzzle. Consumers may prefer to live near good schools or universities, away from high crime areas, away from hazardous waste sites, etc.
Exit from foreclosure:
Properties may exit the foreclosure process in several ways. Pre-foreclosures may exit the process prior to the Foreclosure Auction in one of the several ways:
• Owner catches up on missed mortgage payments
• Owner gets a loan modification to reduce their mortgage payments
• Owner sells the property for less than what is owed on the loan (short sale)
Properties scheduled for a public foreclosure auction exit the foreclosure process by being sold to a third party buyer at auction.
Safe buying of foreclosed property:
Buying foreclosed property is mostly the investors looking to purchase properties at below-market-value prices and then selling it for a profit.
• Pre-foreclosure sale
Many owners of homes that go into foreclosure have been struggling financially for almost a year before they give up, which usually means that the house has not received needed repairs or general maintenance for a while. Pre-foreclosure is like a grace period. The homeowner is being warned that they’re in default and need to do something about it, but at this point, the lender is unable to claim back the property and sell it to recoup their costs. This is often a good time for an investor to approach the homeowner with a fair offer to purchase the property.
• Bank owned properties
A foreclosure takes place when a homeowner or property owner cannot pay the mortgage fees on the property and is forced to give up the land to pay back what is owed. Bank-owned properties offer the safest deal for inexperienced foreclosure buyers. The lender might offer to finance the property at a below-market rate or with a lower-than-usual down payment. In most situations a bank will be looking for a quick sale, and as such will offer many incentives and benefits to prospective buyers. In order to purchase a property in a foreclosure sale, the buyer must have a cashier’s check in hand for the full amount of the bid. If the buyers are successful then they will be offered the house in its ‘as is’ condition. Foreclosure homes bought in good areas at below market values that appreciate annually can be a sound investment strategy for many investors.
Tips for safe buying of foreclosed property:
• Locate properties
• Determine property condition
• Ascertain market price value
• Hidden foreclosures
• Read bank owned addendum
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