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).
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
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
Next Step: How to buy via
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.
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