American Foreclosure: Everything U Need to Know About Preventing and Buying
Because of this, they can no longer afford their monthly payment. Examples of such events include:. It could be something as simple as an increase in their mortgage payment. For example, those with an adjustable rate mortgage may have an increase in interest, which will raise their mortgage payment.
What Is a Foreclosure and How Does it Work? | ZING Blog by Quicken Loans
Or, if there is an escrow shortage due to a rise in property taxes or insurance premiums, the escrow payment will increase. And since property taxes and homeowners insurance are typically paid through the monthly mortgage payment, the monthly payment will rise as well. These instances are not uncommon with mortgages and they depend on the terms of the mortgage.
While most homeowners go into foreclosure because they cannot make their mortgage payment, some enter into foreclosure because they intentionally miss their payments. This often happens when their home is underwater and they no longer have any financial motivation to continue to pay their mortgage. When a home is underwater, the amount owed on the mortgage is more than the home is worth. When they no longer have equity, some homeowners see no reason to continue making their payments.
There are two types of foreclosures. A judicial foreclosure involves going through a court and allows the homeowner to contest the foreclosure. A non-judicial foreclosure does not require court action. The type of foreclosure and the process it uses will differ from state to state. Whatever the type of foreclosure and whatever the state, the process generally involves five stages.
No matter the reason a homeowner goes into foreclosure, the process begins the same way: missed payments. Once the homeowner begins missing payments, they are no longer upholding their responsibilities of the loan and the lender can come to collect. In most cases, lenders are willing to work with the homeowner to restructure the loan and lower or delay payments.
If the homeowner needs additional assistance, they may find it through:. Also called a Notice of Default NOD , or lis pendens suit pending , the public notice is a written notification to the homeowner that the lender will pursue legal action if the debt is not paid. Once the lender records the public notice, the pre-foreclosure stage begins and the home enters the early stages of repossession.
At this point, the homeowner typically has 90 days to take action. If they want to avoid foreclosure and avoid eviction, they have a few options:. A short sale is a voluntary sale of the home before foreclosure. When that happens, all of the proceeds from the sale go to the lender and the sale cannot happen unless the lender approves it. A short sale is usually preferable for both the homeowner and the lender.
2. You Can Buy Foreclosures in One of Two Main Ways
For the lender, a short sale will help recover as much of the loan balance as possible while avoiding the cost of a foreclosure. And, if the property sells for the amount owed, both parties benefit even more. The lender is able to recoup all of its money and the homeowner is able to avoid the credit hit. If the sale price is more than what is owed, the homeowner will get to keep whatever money is left after the mortgage is paid off.
Another way for both parties to avoid foreclosure is with a deed in lieu of foreclosure.
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- Buying a Foreclosed Home!
In this transaction, the homeowner voluntarily signs the deed over to the lender or bank and is released of all mortgage obligations. The lender may benefit by avoiding the costs and additional time involved in the foreclosure process. However, it may only approve a deed in lieu of foreclosure if the homeowner cannot sell the home in a short sale and there are no other liens on the property.
Even then, the lender may not accept this offer.
Buying a Foreclosed Home
If the homeowner cannot sell the home in a short sale, make up the late payments, or pursue a deed in lieu of foreclosure, the home will then go to public auction. When the time comes, the mortgage investor or its representative, the trustee, will put the home up for auction. Also known as a trustee sale, the auction is open to the public and will often take place on the steps of the county courthouse, in a conference room or convention center, or even online. Since the mortgage investor, terms of the loan, and specific state guidelines control the policies of the auction, every auction will be different.
However, you can expect similar processes and requirements. At the auction, the minimum bid is normally set at the balance owed on the loan, and the foreclosed home is sold to the highest bidder. That person must pay cash for the full amount or a significant deposit immediately. Though the highest bidder is the winner of the auction, they may not necessarily win ownership of the home.
Typically, they will need to pay the sale price or full loan balance, plus any interest and costs the bank incurred during the process.
If the home was purchased at auction, the previous homeowner must move out of the home, and the new homeowner can do with the home as they please. Some people move into the home as their permanent residence while others rent out or sell the home and make a profit. Oftentimes, the home does not sell at auction because the mortgage investor does not approve any bids or the pool of buyers who can pay cash is limited.
When this happens, the foreclosed home becomes a bank-owned property, also referred to as a real estate owned property REO.
As stated before, an REO is not the same thing as a home in foreclosure. A home in foreclosure is going through the process of being repossessed by the bank, while an REO is a home that has already been repossessed by the bank.
In an REO, the bank is the sole owner of the property. As the owner of the property, the bank must pay property taxes on the home.
Keep this in mind when buying a home in any stage of the foreclosure process. When buying a home in foreclosure or an REO property, it can be easy to get your hopes up about finding the perfect home for a steal. One important consideration is that the condition of a foreclosed home can be a toss-up. Typically, there are some issues with this type of home, and they can range from minor repairs to absolute deal breakers.
There are also a few different ways to buy the home, and some methods will fit your goals better than others. How you purchase the home and who you purchase it from will depend on if you are buying a home in foreclosure or buying an REO property. Because of this, there are specific factors to consider when purchasing from the homeowner stages 1 — 3 , at the auction stage 4 or from the bank stage 5. While the short sale process is similar to a traditional purchase, one key difference is that the bank, not the homeowner, must approve the offer and the terms of the purchase. There are generally two types of foreclosures: judicial and non-judicial.
In judicial foreclosures, the lender may file a lawsuit in order to obtain a court order to sell the property. This usually happens after 90 days of delinquency. In a non-judicial foreclosure, the process follows the procedures spelled out in the mortgage or deed of trust that allows a trustee—the bank or mortgage company—to foreclose on and sell the property.
After the required time has elapsed, typically after days without making a payment, the homeowner will be sent a notice of foreclosure sale, which will provide notice of the date by which the premises must be vacated and may include the total amount in arrears as well. Please Note: At any point during these proceedings, you may be able to keep your home if you pay off the loan and all foreclosure proceeding costs accrued.
The sale of a foreclosed home could involve a public sale held by an auction, where the highest bidder can buy the property. If there are no buyers, the lender may buy the property by submitting a credit bid based on the amount owed on the mortgage. If the lender takes the property, it could be sold in a private sale at a later date.
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If the homeowner has not vacated the property by the time of the foreclosure sale, an unlawful detainer lawsuit could be filed to evict the homeowner. You may ask for time to move out of the property; however the bank does not have to grant the request and may request that you evacuate the property immediately. Foreclosure is a legal process that employs many terms that may be new to you.
You can always call for clarification as well. Our HUD-certified counselors can help you better understand your financial condition and weigh your options.
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