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ABOUT FORECLOSURES
A foreclosure is a legal process in which a mortgage company or lien holder takes possession of a property due to default. If you purchase property and secure financing through a mortgage company, you sign documents agreeing to repay the home loan over a certain number of years. Although you're the owner of the property, the mortgage company holds the note until you pay off the balance. At any time during your mortgage term, the lender can foreclose if you stop making payments. However, the foreclosure process is not immediate.
Missing one or two mortgage payments will not usually initiate the foreclosure process. In most cases, mortgage lenders do not act until payments are 90 days past due. Lenders start the preforeclosure process at this time in which they mail a Notice of Default to homeowners. If you receive this notification, you're given three calendar months to bring your mortgage current or else risk foreclosure. You can either pay the delinquent balance plus fees or sell the home. If you're unable to catch up on your home loan payments or sell the home during this three month period, your lender will foreclose and take back the property.
Home foreclosures are no picnic for mortgage lenders due to the cost of reclaiming a property. But for property owners, the process can be devastating. Multiple factors can contribute to foreclosure, such as loss of employment, disability, sickness and divorce. And despite your best efforts to keep your mortgage current in a crisis, you might default and lose the property. Mortgage lenders issue a public notice of foreclosure which can embarrass property owners. In some cities and counties this notice runs in the local newspaper. Additionally, home foreclosures cause significant damage to credit scores with scores dropping as much as 200 to 250 points. With this, it's increasingly difficult to acquire new credit cards, auto loans and even rent an apartment. While a foreclosure remains on credit reports for a period of seven years, recovery is possible. In fact, some people who lose their homes to foreclosure can purchase another property in about three years. This is subject to maintaining perfect credit after the foreclosure and improving their credit history by paying creditors on time and paying down debt.
Although foreclosures are a property owner's nightmare, they're a dream for real estate investors and people looking to buy a primary residence. After foreclosing a property, the mortgage lender may auction off the property to the highest bidder. If the property does not sell at auction, the mortgage lender retains and continues to market the property for sale. Bank foreclosures are sometimes sold below market value which translates into an excellent deal for the right buyer. Anyone interested in buying bank owned real estate can contact local banks and request foreclosure listings. Additionally, many real estate agents work with banks and have access to these listings. Understand, however, bank foreclosures are often sold "as-is," and some of these properties will need extensive repairs and improvements. MORTGAGE LOAN Q&A: HOW MANY MORTGAGE PAYMENTS CAN I MISS BEFORE FORECLOSURE HAPPENS?By Casey Bond
A: The foreclosure process does not happen overnight, and the exact time frame depends on which state you live in. However, there are federal rules surrounding how many mortgage loan payments you can miss before foreclosure proceedings will begin. Essentially, you have about 90 days, or three missed payments before your lender will begin pursuing foreclosure:
Most lenders will offer a grace period for mortgage payments, usually about 15 days, during which you can be late sending in your payment but aren't considered to be in default. However, if you don't make your payment within this time frame a late charge will be added to the balance owed. Additionally, if you fail to send in your mortgage payment after the grace period your loan servicer will call or mail a letter to let you know you're delinquent on the loan.
If the above scenario happens a second month in a row your lender will become more aggressive in contacting you about your missed payments, most likely calling you by phone to discuss why you are delinquent and how the two of you can solve the issue. Take the call, as you may be able to negotiate a solution early.
By the time you reach three months of missed mortgage payments you will be considered in default on your loan, the first step on the road to foreclosure. Your mortgage servicer will send you what's known as a "demand letter" or "notice to accelerate" which is a document that notifies you that you're in default, how much money is past due, and gives an official 30 day warning to bring your loan payments current or else foreclosure proceedings will begin.
By this point, if you have failed to bring your mortgage payments up to date or taken steps to negotiate payments with your lender, foreclosure is all but imminent. Your servicer will bring legal action against you and begin foreclosure proceedings. This is generally a fairly lengthy process that can take several months and you will be responsible for some legal fees as well. It's important to do whatever you can to prevent foreclosure proceedings to go through. Once your home is sold at auction it's gone for good. If you begin having trouble paying your mortgage on time, seek assistance at the first sign of distress. Don't wait until it's too late to work out a deal with your lender or government program. PROS AND CONS OF BUYING A FORECLOSED HOMEBy Jennifer CaloniaWith home prices and mortgage rates at all time lows, it's a good time to buy, and an even better time to buy foreclosed properties. However, it is not as easy as just going on a few tours and picking out a home. Foreclosure describes the legal proceedings that take place when a lender has notified the courts of a borrower's default on their mortgage loan which may ultimately result in an attempted foreclosure sale of the property. At any point during the foreclosure process, from when the borrower first defaults on the loan to after the foreclosure sale, you may be able to purchase a home at substantially less than market value. Although it is a process, much like buying any other home, it is a little different with plenty of pitfalls to avoid along the way.
There are four points during and after foreclosure when buying a foreclosed home is possible and can help you land a good deal:
This is often the most desirable point to purchase a foreclosure because you'll be dealing directly with the homeowner who’s facing default at this stage. This time period is also referred to as preforeclosure.
When a homeowner is in default, the lender may opt to initiate a short sale. Lenders are often willing to sell the home for less than the remaining amount on the existing mortgage loan only if the purchase will be more cost effective than the foreclosure proceedings and resulting resale.
Once a home has reached its official foreclosure date as established by the court or power of sale, it will be put up for sale in a foreclosure auction. Prospective home buyers will be permitted to bid on the property which may result in a great deal on the price. However, you run risk of not being able to perform a proper home inspection on the property prior to the sale.
If the foreclosure did not result in a sale, the property then is labeled "Real Estate Owned", basically meaning there is no longer a mortgage involved and the bank or lender is the official owner of the defaulted property.
There are two types of foreclosures which is generally determined by whether the loan was a mortgage loan, or involved a power of sale or deed of trust. The type of foreclosure determines how the property will be sold, and may also be influenced by the state's foreclosure laws.
Depending on your state's laws and the type of mortgage involved, the property may be put up for sale in a Judicial Sale. A Judicial Foreclosure, also known as a Sheriff's Sale, means that the court is involved in supervising the sale. The highest bidder that meets court approval will become the owner of the property with proceeds going to satisfy the mortgage first, then lien holder and finally, the borrower if any is left over.
If a power of sale (a clause that allows the lender to sell the property if the borrower defaults) or deed of trust (a mortgage involving three parties: lender, Trustee and borrower) is used in the mortgage, the foreclosure can then be handled outside of the court system by the mortgage holder or Trustee, then called a Trustee sale. The auction will be open to all bidders, and typically the highest bidder who can also meet all the requirements established by the lender or Trustee will become the new property owner.
A foreclosure auction is as fast paced as an auction for antiques. Whether the auction is a judicial auction or non-judicial auction, they function basically the same way. When preparing to join in the splendor of a foreclosure auction you need to make sure your financial documents and records are all prepared and in order. Many times prequalification mortgage approval letters are required to gain access into an auction. Remember, these homes already went into foreclosure once and banks are not interested in the next round of owners who are likely to repeat the cycle. Before the foreclosure auction, research the properties you are interested in thoroughly. Leave no stone unturned when it comes to investigating the comparable home prices of neighboring properties, local school districts, the closest fire department and hospital. You should also consider any developments that may be going up in the neighborhood you are interested in, as well as the condition of the surrounding area. The key to being successful at a buying a foreclosed home via auction is knowing the properties you are interested in, researching comparable properties and sticking to your budget.Just keep in mind that you are more likely to have access to inspecting the property if it is a non-judicial sale, than a judicial sale.
While the prospect of a foreclosure is unfortunate for the borrower who has defaulted on the loan, foreclosed homes pose as a genuine opportunity to snag a home for less. The key reasons buying a home in foreclosure can be financially advantageous for your future are:
If you are getting the itch to purchase your next home and buying a foreclosed home sounds like an intriguing investment, it's important to also be aware of the dangers a foreclosed property may harbor. A few examples of the disadvantages of a home purchased from a foreclosure include:
Take the process slowly and make sure that you can afford not only the purchase, but also the costs associated with home ownership for the long haul.
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