What is a “Foreclosure” in Real Estate?

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The American dream is still to own a good home. The good news is that you can own your dream home at a lower price if you know where to look. Houses that are in foreclosure can be acquired at lower price than other houses sold through the traditional owners. In 2008 when the American economy underwent a recession, lots of people who owned houses were unable to pay mortgages leading to foreclosure. By now you may be wondering the meaning of foreclosure and how it works. Let’s read on to learn more. 

What is Foreclosure?

Foreclosure is the legal process of a lender acquiring the title of a house and reselling it to get back their money. Usually, the house is repossessed by the lender if the borrower for whatever reason isn’t in a position to repay the principal and the interest of the loan acquired. 

How Does Foreclosure Work?

When a borrower fails to make a payment on a loan or mortgage, the loan is declared delinquent. Usually, lenders give a grace period of about 3-6 months after which the house is repossessed. However, if a borrower can catch up on the payments before the grace period they can secure their home. Ideally, the process of foreclosure begins as soon as a borrower defaults on monthly repayments. 

Types of Foreclosures

There are two main types of foreclosures discussed here. 

1.  Judicial foreclosure

Here, a lender informs the borrower on the missed loan repayments and requests them to catch up. If the borrower fails to oblige, the lender files a lawsuit against them and the notice is placed with the recorder’s office. Finally, during post-trial, the property is auctioned at a public auction. 

2.  Non-judicial foreclosure

For this type of foreclosure, the bank or lender has the right to sell the house in the event a borrower defaults. However, a notice is given before giving the borrower a grace period after which the property is sold by the lender. For this foreclosure, the claim is made with the deed’s office depending on the location. 

Why do Sellers / Homeowners go into Foreclosure?

questions on why homeowners go into foreclosure
Photo by Tierra Mallorca on Unsplash

Here is a detailed guide on some of the reasons why sellers or homeowners go into foreclosure. 

Death

Death in the family may lead to financial strain especially if the deceased was the sole provider in the family. 

Loss of a job or resigning

Loss of a job could render a borrower bankrupt and unable to catch up on loan repayment. An individual could also resign from a job probably due to frustrations at work. Sadly, some companies also close down and retrench the employees. 

Accident or Sickness

A family can also encounter an accident that can lead to financial strain in bid to foot medical bills. Besides, accident victims require a lot of attention even after the accident. Major chronic illnesses can also drain a family due to expenses spent on medical requirements leading to inability to pay a pending loan. 

Negative Equity

In some cases, the house may depreciate due to various reasons which can make a borrower pay more than what the house is worth. This forces some homeowners to go into foreclosure as a way of trying to refinance. 

Increased Interest Rates

Some homeowners face foreclosures when the interest rates on mortgages acquired incur very high-interest rates. In subprime mortgages, the initial interest rates are usually low only to rise over the years. In most cases, the low-income earners and those with lower credit scores are the most affected by subprime mortgages. Eventually, such homeowners become incapable of paying for the loans leading to foreclosure. 

Are you in foreclosure? Check out our article about how to sell your home fast!

Buying Homes at a Trustee Sale

Now that we understand what a foreclosure is, let’s look into a trustee sale. 

Ideally, after a home is put on foreclosure, the lender or the bank identifies a trustee to act on their behalf. In most cases, the trustee is a law firm. For a trustee sale to happen, the public is notified through a local newspaper of the date and time of the auction. The notification also indicates the name of the owner of the house. 

The trustee sale aims at a lender recouping the outstanding balance on a defaulted loan amount. However, the lender has the right to determine whichever opening bid amount they want. In most cases, the opening bid starts at the amount owed to the bank by the borrower. 

If you want to buy a property at a trustee sale, you have to ensure that you conduct some due diligence. This is because at times the winner of a bid during the sale may end up paying liens charges associated with the property if any. A real estate attorney can help conduct such research on the property to know how much debt was owed to the bank by the owner. From the search, you can also find out the value of the house. 

perform due diligence on foreclosures
Photo by Acharaporn Kamornboonyarush from Pexels

Buying a Foreclosure

To buy a foreclosed home from the bank or in an auction, you have the advantage of getting a good priced deal. The first step to owning a foreclosed property is searching for a real estate professional. Alternatively, you can deal with the bank’s real estate agent to save on the commission splitting. 

Secondly, you have to get a preapproval letter from your bank. The letter shows your income and credit score. The preapproval letter makes it fast to secure a deal with a lender. However, if you have the liquid cash, you can always pay with all cash during the auction. 

Also, make sure you conduct a comparative market analysis to determine the value of such a house in the market. You can do this by checking on how much such properties have fetched in the recent past. Lastly, ensure your bid is competitive enough during the auction because foreclosed houses can sell fast. 

It is important to remember that one major consequence of buying a house placed on foreclosure is that you aren’t guaranteed the condition of the house. These houses are under the custodianship of the bank and it cannot fix any plumbing issues, termites, or painting. You have to incur the cost of renovations if need be. 

Understanding a Mortgage Release and a Short Sale

Homeowners don’t always have to undergo a foreclosure of their home. There are other alternatives to sort out the delinquency. One option is the short sale whereby you can request your lender to allow you to sell the property to settle your debt. Usually, a short sale involves selling the property at a lower value than what it’s worth. 

Alternatively, you could opt for a mortgage release. A mortgage release involves a homeowner voluntarily giving up the ownership of the home to the bank. The mortgage release agreement could also give you a small amount to facilitate your movement to another cheaper house. In other mortgage releases, the owner is allowed to stay in the home for a specific period without paying rent as they prepare to relocate. 

In a nutshell, foreclosures are painful for the homeowners and the lenders. But there are opportunities for individuals who happen to win a bid during a foreclosure to pay lower prices for a home compared to market rates. However, before a foreclosure happens, a homeowner has the choice of opting for a mortgage release or a short sale. 

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