The Foreclosure Process: How it works, and how it can work for you.
July 16, 2007
When we take out a mortgage, we pledge collateral – in the form of the property we intend to buy with the loan – as security against our mortgage. In the event that we stop making payments the lender can take legal steps to acquire our real estate and sell it in order to pay off the outstanding debt. Taking possession of the collateral – or “taking back” the house – typically happens over a timeline of several weeks and involves a series of specific steps and procedures that are dictated by the particular laws of the state where the property is. The process by which all of this happens is called foreclosure.
The best way to understand the concept of foreclosure is to think of it not as a single isolated event, but instead as an ongoing process that culminates in the repossession of property.
To help you better visualize the concept; here is a quick six-step synopsis of a typical foreclosure timeline:
1#
The Late or Skipped Payment
When a borrower makes a late payment, the lender adds penalties, and with the extra fees added to the regular monthly payment amount, it gets progressively more difficult to come up with the payment. For many homeowners this creates a snowball effect, and one late payment can quickly accelerate into a missed payment. As soon as the first payment is missed, an official letter of notification is sent to the borrower.
2#
When the Borrower Defaults, the Lender Takes Action
As soon as you miss a payment, your written contract with the lender is broken and you are in default. This means that the mortgage company’s legal department can begin foreclosure. Mortgage companies are usually prompt about filing foreclosure documents. By the time you miss a second payment, the foreclosure will be officially underway and you will already be dangerously close to losing your home.
3#
Remedies to Help Avoid Foreclosure
Lenders do not like to repossess property. It is bad for their business, and statistics show that each time a mortgage company forecloses on a home, they lose as much as 50 percent of their investment. So talk to your lender and let them help you figure out a way to get back on track. Cutting off dialog with the lender only invites disaster. If you promptly make your payment – plus the additional fines and penalties – you can stop the foreclosure proceedings. Your credit will suffer a blemish, but you will avoid the more severe repercussions.
4#
When Foreclosure is Inevitable
If a homeowner can’t come up with the money to “cure” the foreclosure, they may be able to sell the house before foreclosure, as a last resort. This way they will lose the house – and may lose whatever equity they have accumulated in the house – but at least they can save their credit from ruination.
Otherwise, about 30-60 days after the first missed payment, the homeowner is given one last chance to remedy the situation. Foreclosure laws vary from state to state, but in most locales the homeowner in this stage of the process has 30 days or less. When that time expires, the homeowner must vacate the premises, and if they fail to do so the sheriff will evict them.
5#
The Foreclosure Auction
Meanwhile, legal notices are posted at the courthouse or in local newspapers, to announce that the lender intends to sell the property at a public auction. Anyone can attend the auction and bid, and the house is usually sold to the highest bidder. The foreclosure auction represents a great opportunity for investors, because foreclosures are usually sold at a deep discount. Even if you aren’t a professional investor, you can still buy a home from a foreclosure auction, and many people find exceptional bargains by buying these distressed properties.
6#
After the Auction
If the lender does not get a satisfactory offer at the action, they may decide to keep the property and sell it through a real estate broker. These post-auction listings are called REO homes (the initials stand for “real estate owned”). The homes sold in this way are usually sold at very competitive prices, and many of the best values in the foreclosure market are found in REO inventories.
How to Benefit from the Foreclosure Market
From start to finish, the foreclosure process usually lasts 60 to 90 days. If you are shopping for a home, you’ll have several opportunities to make foreclosures work for you.
First of all, you can offer to buy a distressed home to help the homeowner avoid foreclosure. To view properties in this phase of foreclosure, search lists and inventories of “pre-foreclosure” listings. The next chance to buy is at the foreclosure auction. Last but not least, to purchase properties that don’t change hands at the auction, you can look at REO listings. To browse REO homes simply contact your local Realtor or visit sites that post REO listings.