What is a Foreclosure?
Foreclosure is a process that involves the mortgagee (i.e. lender) selling or taking ownership of a property in order to recover whatever amount is owed in addition to damages or losses it may have incurred due to a mortgagor's (i.e. borrower) default on a mortgage agreement.
Mortgage agreements are binding contracts that include what is called an Acceleration Clause. The Acceleration Clause is what makes a mortgage agreement so intimidating. Mortgage Lenders take great risks in lending borrowers thousands of dollars so that they may own a home. It makes sense for them to take precautionary measures to prevent losses. They are not a charity group.
Sample of Acceleration Clause:
It is agreed that if the parties hereto, or any of them at any time fail in business or become insolvent, or commit an act of bankruptcy, or if any deposit account or other property of the parties hereto, or any of them, be attempted to be obtained or held by writ of execution, garnishment, attachment, or other legal process, or if any assessment for taxes against the parties hereto, or any of them, other than taxes on real property, is made by the federal or state governemt, or any department thereof, or if the parties hereto fail to notify you of any material change in their financial condition, then, and in such case all of the obligations of the parties hereto to you, or held by you, shall at your option immediately become due and payable without demand or notice.
Illustration: Mickey obtains a home loan from the Bank of Donald in the amount of $120,000 in order to buy his wife Minnie a new home. It is agreed that Mickey will pay off the loan in 24 monthly installments of $5,000. On the fifth month, Mickey is unable to make his payment. On the sixth month, Mickey misses yet another payment. Soon after, Bank of Donald sends Mickey a notice of default on his home loan. The acceleration clause would ultimately require that Mickey must immediately pay Bank of Donald the entire balance of $100,000 as well as an additional $5,000 to cover other costs the bank incurred such as attorney's fees, or he will lose his right to buy the home. Mickey will not be able to get a refund for his $20,000.
By the time a borrower is faced with a notice of default, he or she has already missed a number of his or her mortgage payments. Because the lender obtains a security interest on the borrower's home (in the form of a lien) at the time the mortgage is signed, the lender is capable of terminating the mortgagor's equitable right of redemption through the foreclosure process. If there are other lien holders that the borrower/home owner is indebted to, those lien holders can also foreclose on the owner's right of redemption. Examples debts that can lead to foreclosures include overdue taxes, unpaid contractors' bills or overdue homeowners' association dues. It is legally required by state law that a defaulted mortgagor be given the opportunity to redeem his or her property by paying the lender the full amount that is owed. If the borrower is able to do so, he or she is able to reinstate his mortgage and continue on his or her merry way. However, once the property is foreclosed, this equitable right is lost.
The time in which the mortgage is allowed put into action a foreclosure should be stated in your mortgage documents.
Foreclosure processes are different in every state. Generally, foreclosures go through similar paths.
Sheriff's Auction: If you have not paid the full amount or complied with the demands that were made by your lender, then you will be referred to your lender's attorneys. The amount of time between receiving your demand letter and the actual day your home gets auctioned off varies from state to state. Nonetheless, a date will be set for the auction, and a notice will be taped to your door. The day of the auction is the actual day of foreclosure. The owner of the home has until this day to pay the lender the total amount that is owed or to find a buyer and sell the property himself.
Many states have a redemption period. A redemption period is a limited amount of time given to homeowners even after their home has been sold at a foreclosure sale to reclaim their home.
Four possible endings for properties in foreclosure:
Investment opportunities during the Foreclosure Process:
If you are looking to buy a home that is in the pre-foreclosure stage, you are going to be working with the owner who has defaulted on his or her loan. Remember that when a property enters pre-foreclosure, the borrower has at least 2 months to reinstate the loan by paying off the amount that is owed. The risk in buying a home in pre-foreclosure is that if the homeowner pays off his or her debt at any point before the auction, then the loan is reinstated, and the foreclosure process is stopped. All the leg work you invested towards purchasing the property may end up go to waste. Buyers need to gather updated trustee information of pre-foreclosure properties.
If the loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. Even though auctions offer some of the best bargains, and is one of the quickest ways to buy a home, there are some risks involved.
The risks in buying a home at an auction is that there is not that much time to research the title and condition of the property before you purchase it. You pay in cash the full amount of the home at the auction, and you buy the home as is. You don't have weeks to hire home inspectors. Some states offer a redemption period for homeowners/borrowers to reclaim their homes even after the home has already been sold at an auction. When looking to invest in foreclosures, it is critical for homebuyers to be familiar with the state and local laws concerning the matter.
Bank-owned or Government-owned (REO)
Purchasing a bank owned property is the most popular choice among those who specialize in investing in the foreclosure market. This is probably because REO properties come with the least amount of risks. REOs are in the last stage of the entire foreclosure process, and the bank is the sole owner of the property. Liens and claims on the home have been removed, and the title has been cleared.