Buying Foreclosures (Part 1)
BUYING FORECLOSURES (Part 1)
Foreclosure is the legal process by which lenders (lien holders) recover the amount owed on a loan that is in default by exercising their right to repossess the property that secured the loan as collateral ("no pay, no stay clause").
The foreclosure process varies slightly from state to state, but it usually has the following steps:
1.The homeowner (borrower) stops paying the mortgage
2.The lenders send the borrower a default notice, explaining the consequence if the borrower does not pay the owed amount plus late payment penalty.
3.The lenders hire an attorney to process the foreclosure and file a public notice ("lis pendens") announcing their intention to foreclose on the property.
4.There is a foreclosure hearing at the county courthouse. If the debt is not restored, the judge sets a date to sell the home by public auction on the courthouse steps.
5.The home is auctioned on the courthouse steps. Normally, if there are no higher bidders, the first lien holder buys the property back for whatever they are owed, and it becomes part of their property portfolio. Note: All "junior" lien holders (except for taxes), such as a second mortgagee and any mechanic liens are extinguished at this point.
6.The lenders normally want to re-sell the property as soon as possible, and they offer the home as a lender-owned (or REO) property via a regular REALTOR.
The foreclosure process can be "interrupted" or terminated by:
- The borrower reinstating the loan by paying amounts owed plus penalties and costs;
- The borrower selling to a third party during the pre-foreclosure period (if the borrower has enough equity in the property or cash to pay any deficit);
- The borrower selling to a third party via a SHORT SALE. If the borrower is "upside down" (i.e. he/she owes more that they can get by selling it) and cannot produce the difference to pay any deficit, in certain instances (like for example when there is a financial or personal hardship) the lenders can approve a SHORT SALE to a third party, allowing the borrower to pay them less than it is owed. Note: In a short sale, all liens must be satisfied to proceed with the sale;
- A third party buying the property at the public auction; or
- The lender buying the property at the public auction
Next: Buying Opportunities with Foreclosures