What is Foreclosure?

What is Foreclosure

So you want to know what makes a property a foreclosure? Let’s define “foreclosure” first of all, as the term is used in a variety of ways. Foreclosure itself is the process where most commonly a lender, such as a bank or mortgage company, takes back a property where the homeowner failed to make their payments according to their mortgage or contract. You will also hear foreclosure used as a term to mean the property that was taken back during this process. This is also sometimes referred to as an REO or Real Estate Owned property.

It’s always good to understand the circumstances of a property in foreclosure. Be aware of the homeowner’s situation and work with them so it becomes a win-win scenario for all.

There are actually several stages to the foreclosure process, and it is important to understand the difference between them. When the homeowner is first behind on their payments that is a private matter between them and their mortgage company. Thereafter starts, what is often called the preforeclosure period. While time frames vary in different states, this preforeclosure process is often started once the owner has missed on average 2-3 consecutive payments. This is typically when the notice of default also known as lis pendens is filed and the owner is notified that the property will be repossessed by the lender if they do not get caught up on their payments by the date provided. During this preforeclosure period the homeowner still has several options.

5 options for a homeowner in foreclosure:

  1. Get caught up on their payments and get out of the foreclosure process and back to their normal payment schedule.

  2. Work out a payment plan with the bank to deal with what is past due.

  3. Negotiate a forbearance or loan modification agreement with the lender that could allow them to pause or reduce their mortgage payments for a limited time while they build back their finances.

  4. Work with the bank to sell the property as a short sale.

  5. Abandon the property and let the bank take it back as a REO property.

If the homeowner does not resolve the outstanding balance via one of these options within the time limit given, then the property will go up for public auction. Check with the county courthouse or the auction house that is holding the auction to be sure you know the rules and regulations for the auction, such as when/how payment is due if you win the auction.

Typically there are 2 results at the auction:

  • Someone makes an acceptable offer and buys the property at the auction.

  • If an acceptable offer is not made, then the bank takes it back and it becomes a foreclosure or REO property. The bank will normally sell it through a real estate agent.

Always be aware of local legal regulations that may affect the purchase as it is an important part of the process. Some areas have a redemption period where the homeowner can get the property back after the auction if they can come up with the money owed. Time frames vary on the length of the redemption period depending on the state. You may want to check with an experienced real estate professional, such as a real estate attorney, to be aware of these regulations such as redemption periods.

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