When a home is purchased, the fundamental agreement between the buyer and loan provider is that the buyer will make monthly payments on the mortgage, failing which the lender may take several steps to remedy the default, and one of those is foreclosure.
A foreclosed property is the term applied to a property where the lender has taken back ownership after the buyer failed to make mortgage payments, usually due to affordability issues. Foreclosed properties can then be sold via auction or conventional property sales channels.
Foreclosure is usually the last action a lender takes when the buyer defaults on payments. There may be less drastic options available depending on the circumstances of the default as well as the contractual terms in place in the purchase agreement. Let’s examine foreclosure and its variations.
How The Process Of Foreclosure Works
The sale of a foreclosed property is the final segment in the foreclosure process. Still, in any foreclosure, five steps precede that sale transaction, so we will examine those in more detail below.
Step 1 – The Buyer Defaults On Payments
If the buyer misses a payment, the mortgage account automatically defaults. Now, this single missed payment will not result in foreclosure proceedings being instigated, but should the buyer continue to miss payments, the lender will seek legal remedy to recover those missed payments.
The buyer may offer a payment arrangement that will commit the buyer to increase payment amounts per month until the arrears are settled or provide a bulk payment that brings the account back to its current status and out of arrears and default.
These arrangements are usually conditional in that should any payment be missed or the payment is not made by a certain date, the lender can then exercise the lien rights and commence foreclosure proceedings.
Mortgage payments are typically made by the 15th of the month, and should one be missed, the lender will issue a missed payment notice and add a late payment fee.
Should the buyer miss a second payment, the lender would contact the buyer by phone and seek to establish the reasons and remedies.
Should a third month’s payment be missed, the lender then would escalate the process by sending a demand letter, whereby the buyer has 30 days to return the account to good standing by making payment to cover the existing arrears.
With this process, the account can be rectified, or there can be a modification of the payment agreement terms. If there is no other option, the lender can foreclose and repossess the property, or the buyer can voluntarily surrender the property.
Deed In Lieu Of Foreclosure
This option is available to owners that default on payments and choose a less financially damaging option over foreclosure. In this scenario, the defaulting owner surrenders the deed to the seller or lender
This is a financial instrument, and the terms of this transaction would be recorded in an agreement. Often, the defaulting buyer would not incur additional fees or costs by not opposing the repossession of the property.
Step 2 – The Notice Of Default
This Notice Of Default is usually only sent once the account is 90 days overdue, i.e., in the fourth month of non-payment. The Notice Of Default is the formal commencement of the foreclosure process but is only sent once the account reaches the 90-day overdue status.
This is why buyers can often default for a month or two without the risk of going into foreclosure; as in most cases, the buyer has experienced a temporary issue financially, and this will be resolved within 90 days, so foreclosure would not be required.
The lender also has to abide by Federal law, which generally doesn’t allow for foreclosure notices to be issued unless the account is overdue by more than 120 days.
Step 3 –Notice Of Trustee Sale & Judicial Vs. Non-Judicial Foreclosures
The notice of sale is filed once the courts have approved the foreclosure process. Still, this notification process may be longer or shorter depending on whether the state requires a judicial or non-judicial foreclosure.
While this sounds technical, judicial and non-judicial foreclosures refer only to whether the process has to be approved by the courts on each step or whether the necessary papers can be filed with the relevant court to commence foreclosure proceedings.
All foreclosures must be done through the courts, but where the court needs to process and approve each step means the process will take much longer, whereas if the lender only needs to file proper documents and does not require court approval, that process will move faster.
Once the court has approved the foreclosure, the lender will then post a notice of sale, and the sale details, like the date, time, and venue, will be notarized in the county where the property is located.
The lender would normally advertise the sale of the property on various platforms and channels, and again, the sale details would be included for interested potential buyers. Aside from the calendar details, the notice of sale will also have the minimum opening bid amount for the property.
While the time frame from the letter of demand to auction can be anywhere from 2-3 months, the buyer still has time up until the auction date to remedy the account from default to current. This would include the arrears amount and possibly attorney’s fees that may have been incurred over the foreclosure process.
Step 4 – The Foreclosure Sale
Before the sale event, the lender will calculate the opening or minimum bid for the property based on the remaining loan value, existing liens, and any taxes due and costs of the sale. As with any auction, the lender may set a reserve price.
By setting a reserve, the lender protects his rights not to be obligated to sell the property for less than the price he wants. If the reserve price is not met, the lender can accept a lower bid or hold the sale later to see if he can get the reserve price.
Assuming the reserve price is met, or there is no reserve, the highest bid wins, and the property is sold to the new buyer and transferred to their name.
They then can take occupation of the property immediately, or they may enter into an agreement determining how long the existing occupant may stay on the property until the new owner takes occupation.
The new owner may also request a rental from the current resident for the period until they are ready to move in, and they could evict the tenants if those payments are not met under the terms of the agreement.
Step 5- Real Estate Owned Sale & Eviction
If the property is not sold at auction based on the appraised price, the lender then becomes the owner and may opt to utilize the services of a real estate agent to sell the property. Typically, this option will take longer but often results in a higher price for the seller, even with the agent’s commission.
While this is in process, the owner may offer a rental option to the existing tenant (the previous buyer who defaulted) or exercise their right to evict the tenant and provide the property for a new tenant.
This property may be advertised for rent through normal channels, but with the advisory that once the property is confirmed as sold, there would be a pre-determined time frame for the tenants to vacate the property before the new owners take occupation.
The new owners may give the tenants a few days to move out and take their personal property as soon as the property is sold. Once this time has elapsed, the local sheriff or law enforcement services will go to the property and, if needed, forcibly remove tenants and possibly impound their belongings.
How To Buy A Foreclosed Property – Pros And Cons
Buying a property that has been foreclosed may yield a windfall for the astute buyer as these properties are often sold for far less than usual. This may be because the owner or lender needs to recover their investment at little or no profit.
Step 1 – Find A Foreclosed Property
Some people will enlist the assistance of a real estate agent that has access to the lender’s Real Estate-Owned (REO) inventory, as most lenders won’t sell to an individual directly. If you are going this route, ensure the estate agent has experience working with REO properties.
This is one option. The second is using the internet. Several good websites offer REO/ foreclosed properties for sale, so you can spend some time looking at these sites:
- HUD – this is an official government site that lists foreclosed homes, and an estate agent contact will also be recorded.
- Fannie Mae Homepath – This site uses MLS numbers, zip codes, or address listings.
- Freddie Mac Homesteps – This is Freddie Mac’s version of the Fannie Mae site.
- Rocket Homes – An online stock inventory of foreclosed homes will list the type of foreclosure.
Step 2- Get Pre-Qualified Before You Buy
As the famous saying goes, “money talks and BS walks” the same applies to buying a foreclosed property. After finding the home you want, take the steps and get preapproved on the mortgage so that when you put in an offer, the seller can see that you are a serious buyer.
Putting money on the table will greatly increase the chance of your offer being accepted and accepted quickly. You may save money as your preapproval amount could be more than you need.
Step 3 – Have The Property Inspected And Appraised Before Buying
This may seem an obvious step in this process, but one that excited buyers sometimes overlook. If you have to pay a professional to do it, you must get a proper opinion and overview of the property’s condition and potential pitfalls.
Damp roofing issues and even structural damage would be noticed by a professional, while those same issues may go unnoticed by the untrained eye. You don’t want to buy a property and move in only to discover that you need to spend thousands of dollars on repairs.
Foreclosures carry a higher risk of damage than sold-by-owner homes; if the seller is pressuring you into buying, that should be a red flag. Always utilize a professional to appraise a foreclosed property before buying it.
Property is often viewed as an investment, and you should never put money into anything that you have not done complete due diligence on. In this case, a professional appraisal and inspection form a big part of that due diligence.
Another reason you want a home inspection is to check whether you will have issues with squatters and squatter’s rights. A home that has been standing empty or unoccupied for a long period may have squatters that have set up residence, and getting rid of them legally can take months and cost thousands of dollars.
Step 4 – Purchase The Property
Once you are completely satisfied that everything is in order, you can purchase the property and make the necessary arrangements with your mortgage lender.
Foreclosed Properties Pros And Cons
Part of the attraction of buying a foreclosed property is that you will get it at a good price and have several loan options. While the bidding process may be a little longer, the lower price could get you some favorable terms on a loan.
With foreclosed properties, you will also have some potential pitfalls, and one of those may be a higher maintenance cost, but the savings can cover these costs on the property price, plus it means you can fix it up the way you want.
If you buy a foreclosed property, make sure you put some funds aside for repairs, as these homes will inevitably require some repair. But if you have a proper assessment done and there are repairs, you can potentially negotiate those costs out of the purchase price.
Conclusion
Foreclosures offer the lender a way out of defaulted agreements, and provided the process is followed, there are usually no further issues. For smart buyers, keeping an eye open for foreclosed properties and having the resources to acquire and flip or keep them offers business opportunities and profitability.
By understanding the processes of foreclosure, whether to prevent your property from being foreclosed or buying a property that has been an important element as a homeowner or a home buyer and used properly, you can either save your home, reduce the financial impact or pick up a property for a steal!