Foreclosure Overview
What is Foreclosure?
Foreclosure is a process
that allows a lender to recover the amount owed on a defaulted loan by
selling or taking ownership (repossession) of the property securing the
loan. The foreclosure process begins when a borrower/owner defaults on
loan payments (usually mortgage payments) and the lender files a public
default notice, called a Notice of Default or Lis Pendens. The
foreclosure process can end one of four ways:
• The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by
state law. This grace period is also known as pre-foreclosure.
• The borrower/owner sells the property to a third party during the
pre-foreclosure period. The sale allows the borrower/owner to pay off
the loan and avoid having a foreclosure on his or her credit history.
• A third party buys the property at a public auction at the end of the pre-foreclosure period.
• The lender takes ownership of the property, usually with the intent
to re-sell it on the open market. The lender can take ownership either
through an agreement with the borrower/owner during pre-foreclosure or
by buying back the property at the public auction. These properties are
also known as bank-owned or REO properties
(Real Estate Owned by the lender).
Foreclosure Opportunities
Pre-Foreclosure:
Buying a property in pre-foreclosure involves approaching the
borrower/owner and offering to buy the property outright. The
borrower/owner can walk away with the equity in the property and avoid
a bad mark on his or her credit history. The buyer has time to research
the title and condition of the property and can realize discounts of
20-40 percent below market value.
Next Step: How to buy a pre-closure
Public Auction:
If the loan is not reinstated by the end of the pre-foreclosure period,
potential buyers can bid on the property at a public auction. Buyers
often are required to pay in cash at the auction and may not have much
time to research the title and condition of the property beforehand;
however, a public auction often offers some of the best bargains and
avoids the unpredictability of dealing directly with the borrower/owner.
Next Step: How to buy via public auction
Bank-Owned (a.k.a. REO):
If the lender takes ownership of the property, either through an
agreement with the owner during pre-foreclosure or at the public
auction, the lender will usually re-sell the property to recover the
unpaid loan amount. The lender will typically clear the title and
perform needed maintenance and repair; however, the discount for these
REO homes is typically less than a pre-foreclosure or auction property
discount. Bank foreclosures can become government foreclosures if the
loan is backed by a government agency such as the Department of Housing
and Urban Development (HUD) or the Department of Veterans Affairs (VA).
In that case the government agency would be responsible for selling the
property.
Next Step: How to buy an REO property