A foreclosure is the legal process a home and property goes through when the homeowner stops repaying the money borrowed from the bank. When the homeowner fails to make payments for a set period of time, the bank takes back the home in order to reduce their losses. This can be a long and painstaking and process, and isn't easy on any party. This article will go through the main information you need to know about foreclosures and how to purchase one.
What is a Foreclosure?
When a homeowner purchases a home, they usually have to take out a mortgage. (Obviously not every homeowner has to borrow money to buy a house, because there are some homeowners who can purchase property with cash.) However, when a buyer doesn't have enough money to purchase a home straight out, they will often ask a bank or credit union to lend them some money to cover the rest of the cost. This mortgage is something they agree to pay, by law. Little by little, as they pay their monthly payments, the borrowers become full owners of the house as they pay back what they owe.
If the homeowners stop paying back the money they owe the bank, then the bank loses the money it lent. Not only does it not get the money back, it doesn't make money on the loan, as no interest is being paid either. When a homeowner misses a payment, it starts the first step of a foreclosure. There are four main parts of a foreclosure:
- Missing a Payment
To begin the foreclosure process, the homeowner must miss a payment on their mortgage. There are many reasons that this can occur, and usually it has to do with some kind of hardship, like death, divorce or job loss. Some homeowners decide to stop paying for other reasons, but most don't have a choice and can't make their payments. This begins the process of foreclosure.
Next, the homeowners must default on their loan. This means they have to have not paid their mortgage for three to six months. Legally, the lender must notify the homeowner that they are defaulting on their loans (this could entail putting a notice on the front door). The lender must also notify the government by filing a Notice of Default or Suit Pending letter. At this point, a homeowner can pay off the payments they missed and begin making normal payments, and the default will be dismissed.
After the Notice of Default has been filed, the home goes into pre-foreclosure. Every lender handles foreclosure differently, depending on state laws. Pre-foreclosure occurs in 30-120 days after the Notice of Default. This pre-foreclosure period is a grace period where the lender has a specific deadline to either pay back what is owed or sell the home. Homeowners can work out a deal with the bank during this time to help save a bit of their credit and not have to go through a foreclosure by selling their home as a short sale if the bank approves. The homeowner can also pay off the excess they owe and the foreclosure process will end.
- Auction or Selling
Finally, if the home is not sold by the pre-foreclosure deadline, it becomes bank-owned. There are two ways the bank will get their money back on their investment of the home. They will either auction off the home or sell it by listing it with a real estate agent, both of which we will discuss later in this article.
After the home is sold, the bank collects the profits and the lien against the property is repaid. The former homeowners credit is damaged, and they will have to wait 7 years before the mark is taken off their credit report.
Tips for buying a Foreclosure
Many individuals are interested in purchasing foreclosed homes because not only are they prices well below market (most banks sell them for the price owed on the home, which is usually significantly less money than what they are worth) but they can increase in value with a little bit of time and effort. There are two main ways a buyer can purchase a foreclosed home.
If a foreclosed home is being sold at an auction, it is usually called a Trustee's Sale. Check with your state to see what the rules and regulations of the auction are before you go.
If the bank has listed the home with a Real Estate company, it's known as an Real Estate Owned property.
To purchase a foreclosure you will need:
- A Pre-Approval from a Mortgage Company
You'll want to prove that you have enough money to purchase at least part of the home and you've been pre-approved for the amount the bank is asking.
- Earnest Money Deposit
You want to show that you're extremely interested in the property by showing a large sum you're putting down to secure it.
- No Contingencies
You can't say that you'll only buy the foreclosure if your own home sells. You must be willing to go through with the sale no matter what.
- A Flexible Timeline
Foreclosures can take a much longer time to purchase than regular homes. Not only will you need to be able to move in whenever and have a place to stay while you purchase the home, foreclosure properties aren't in great conditions most of the time. You'll need to fix up any problems within the home, and that may take time before you are able to move in.
- Be OK with an As-Is property
Usually with auction properties, buyers aren't allowed to go inside of the homes for a home inspection before. You have to accept the fact that when you're buying a foreclosed property, you may not know how much you'll be spending to make it livable. With some Real Estate Owned properties, the bank may have a little bit more wiggle room on the as-is contingency, and may fix up different parts of the home according to your requests before you purchase. It all depends on the lender.
If you do purchase a foreclosed home, remember to purchase a home warranty to protect your systems and appliances. As long as the home has been lived in, you know that the systems and appliances will break down eventually. You will have to repair or replace them, so why not save money using a home warranty? Compare our plans and pricing here to see how much you could save on repairs each month.