Foreclosure Property Explained In Less Than 5 Minutes
Charlene Rhinehart is an expert in accounting, banking, investing, real estate, and personal finance. She is a CPA, CFE, Chair of the Illinois CPA Society Individual Tax Committee, and was recognized as one of Practice Ignition’s Top 50 women in accounting. She is the founder of Wealth Women Daily and an author.
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Foreclosure is the process of a lender seizing and selling a property to a new buyer when borrowers fail to make their mortgage payments as agreed. It enables the lender to recover at least some of the remaining mortgage balance.
How Does Foreclosure Work
Foreclosures are likely to occur when the homeowner has failed to make agreed-upon payments on the mortgage, but the reasons behind nonpayment can vary. Sometimes, job or income loss is the culprit. Medical bills or credit card debt might make it impossible for the homeowner to stay afloat. Foreclosure can also be the result of bankruptcy, divorce, or disability.
In some states, there must be a court proceeding before the home can be taken. Other states offer options that don’t require a court to get involved.
A lender can’t legally foreclose on a home until the homeowner is at least 120 days behind on their mortgage payments.
How To Buy A Foreclosed Home
To find a foreclosed home, you can peruse listings of foreclosures on realtor.com®, which may also be marked as bank owned or REO. If you spot a home you like, contact the real estate agent on the listing as usual.
The biggest caveat when buying a foreclosed home is that it is typically sold as is, which means the bank is not going to fix any problems. And there may be plenty of them, considering that many foreclosures have been slowly crumbling into disrepair due to the previous owners financial strain. And unlike a traditional home sale, in which disclosure requirements force owners to reveal a homes every flaw, theres no such legal stipulation in a foreclosure. What you see is truly what you get.
Thats why foreclosed homes risk costing buyers a ton of money to renovate that could negate their supposed savings. This is why Eric Workman of the Chicago-based residential rehab lender Renovo Financial suggests that buyers take extra precautions such as the following before making an offer:
If you find out the home has problems, you will want to carefully weigh whether its worth all the extra work. In some cases it will be in others, it may be more prudent to walk.
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What Is The Foreclosure Process
As a reminder, foreclosures are a process and do not happen overnight. Before a mortgage lender can begin the foreclosure process, the homeowner must be at least 120 days delinquent in mortgage loan payments. Once it has been established that the mortgage loan is in default, the four phases of foreclosure begin. As mentioned previously, the amount of time for each phase varies depending on which state you live in.
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What Should You Do During A Foreclosure
The main thing to remember, as we mentioned previously, is that the bank does not want to take your home. They will have to go through a lengthy process to get the house back, and it can be costly for them also.
Before you get too far into the process, you should contact the bank and see if you can work out a payment plan. Your credit rating might take a hit, but the important thing is that you can save your home.
Banks are not in the business of taking homes and losing money. They want to make money, just like many of you. Do not just ignore calls and mail from the bank.
It is critical for you to work with them. If you work with them, they are more willing to work with you. Every state has their own laws on foreclosure. Do not just rely on random internet searches. Make sure you look for your information for your state.
One more thing you can consider doing to at least delay the foreclosure process, is to ask your lender for an original note of the mortgage. The idea here is that you can buy yourself time to get caught up on the payments. Dont consider this step if you know you wont be able to get caught up.
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The Foreclosure Process In 5 Steps
From the time of your first missed mortgage payment to the foreclosure sale of your home, there are several steps in the foreclosure process. These phases can vary by state, but generally follow this timeline. Each state has its own laws pertaining to the process of foreclosure and foreclosure sales. These can govern the borrowers relief options if already in foreclosure, how to go about posting a Notice of Sale, the sale timeline and other parts of the process.
Trustees Sale Or Foreclosure Auction
After a mortgage lender takes the proper steps to notify the homeowner or borrower and local municipalities of a foreclosure, they can try to sell the foreclosed property at a public auction. Oftentimes, the homes sold at foreclosure auctions are sold at a loss, but if the home sells for more than what is owed, any profits go toward paying off other liens on the property.
Foreclosure auctions usually set a minimum bid equal to the balance owed on the mortgage and the home is sold as-is. Borrowers have until the date of the auction to catch up on payments and keep their home.
Phase : Real Estate Owned
The lender will set a minimum bid, which takes into account the appraised value of the property, the remaining amount due on the mortgage, any other liens, and attorney fees. If the property is not sold during the public auction, the lender will become the owner and attempt to sell the property through a broker or with the assistance of a real estate-owned asset manager. These properties are often referred to as bank-owned, and the lender may remove some of the liens and other expenses in an attempt to make the property more attractive.
Example Of Foreclosure Events: The 2007 Housing Market Crash
One major culprit in foreclosures needs to be mentioned, and that is an economic depression. One of the best examples is the housing market crash of 2007/2008. Home sales and prices soared, largely fueled by subprime mortgages. Eventually, the bubble burst when home prices started to drop, causing a full collapse of the housing market and, inevitably, a large-scale economic crisis.
Many people were left underwater on their home mortgages owing more on mortgage loans than their homes were worth after the crash and opted to walk away from their homes because it was more cost-efficient to do so. In such cases, families invited foreclosure because it was cheaper to walk away than continue to pay on a home that was worth far less than it would cost them in the end.
The information surrounding foreclosures, how and why they occur, and what happens afterward is extensive. To keep it simple, its important to understand that foreclosure is a result of unpaid loans/failure to pay off a mortgage. An individual who fails to make payments will see their loan go into default first. After 90 days, the lender can give an official notice of foreclosure and, if the debt remains unpaid, take full ownership of the property.
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Do I Owe Property Taxes When My House Is In Foreclosure
Legally, youâre required to pay property taxes as long as you own the home. Sometimes, the lender pays the taxes in order to sell the home. If taxes become overdue, the government can seize the property, which would make it difficult or impossible for the lender to recoup what theyâre owed. Taxes are attached to homesânot peopleâso once the property is sold the taxes are the responsibility of the new owner.
âMortgage contracts will list how unpaid property taxes are handled,â says Leslie Tayne, head attorney at Tayne Law Group, a debt settlement law firm in New York. âLenders can sometimes front the property tax bill and send the owner a bill to recoup their costs. Some states do not allow collections on payments made by lenders after a foreclosure.â
How Long Does Foreclosure Take
Properties foreclosed in the second quarter of 2021 had spent an average of 922 days in the foreclosure process, according to the U.S. Foreclosure Market Report from ATTOM Data Solutions, a property data provider. This is down slightly from the previous quarterâs average of 930 days, and up 34.5%, from 685 days, in the second quarter of 2020.
The average number of days varies by state because of differing laws and foreclosure timelines. The states with the longest average number of days for properties foreclosed in the second quarter of 2021 were:
The graph below shows the quarterly average days to foreclosure since the first quarter of 2007.
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What Should You Not Do During A Foreclosure
It has already been alluded to, but the most important thing to NOT do is ignore the entire situation. When you receive that initial notice of default from the bank, the very best thing you can do is respond to it.
Typically, the bank honestly does want to keep your home from being foreclosed on. So, do not ignore the calls and letters that you get. The next thing you should refrain from is just walking away.
Not only would just walking away make future home ownership more difficult, as previously mentioned, if a home is foreclosed on the homeowner would need to pay the difference between the selling price and the money that is owed for the mortgage.
If you walk away, you could owe more money than if you would have stayed in the home a few more years. Home values are on the rise, and working with the bank or a financial advisor could help you stay in your home and sell it for more.
How A Foreclosure Works
When it comes to real estate, a mortgage lender has legal ownership over a property. In a mortgage, the borrowers home is established collateral, and should you accrue missed payments, your lender can legally repossess the property.
Daunting as this may sound, keep in mind that foreclosure is a gradual process that could be prevented in early stages. And remember, since a foreclosed home or foreclosed property can be difficult to sell, its likely that your lender also wants to avoid foreclosure. This means your lender is likely open to working with you to keep foreclosure as a last resort.
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The Process Of Foreclosure
When you do fall behind on making your mortgage payment, youll receive letters from the lender called a notice of default.
The term default, in this context, means that you have not been meeting your financial obligations.
When you receive this letter, it is the official first step in the process of foreclosure, and will be sent within sixty days of you failing to meet the payment deadline. Some lenders will sent it within thirty days.
When you receive this letter, what you need to do is contact the loss mitigation department of your lender and explain the situation to them. You can then hopefully work to find a solution using either of the options that were discussed above. You may even be able to negotiate new loan terms.
But if you continue to fail to follow through on the loan, the lender will then file paperwork to foreclose your house.
In this scenario, its important to note the differences between judicial and non-judicial states.
A judicial state is where courts are involved very heavily in the foreclosure process. Examples include Illinois and New Mexico.
A non-judicial state is where the bank can move forward on the foreclosure without receiving approval from the court. This is because the deed of trust will include a Power of Sale Clause that allows the lender to sell the property without having to go to court. Examples of non-judicial states include Tennessee and Michigan.
Short Sale: Selling A Home In Pre
If a loan modification cant be worked out, another step in the pre-foreclosure process may be a short saleessentially selling the home to satisfy the bills with the bank.
To negotiate a short sale, homeowners need to talk to their lender about selling their home. If the lender agrees, then the homeowners contact a real estate agent to help them find a buyer , and the bank gets to keep the money for the sale.
Almost every short sale is in pre-foreclosure, says Richardson. And short sales can be attractive to lenders as the homeowner will be doing the hard work of trying to find a buyer.
If youre able to work out a short sale agreement, and you find a buyer that garners back approval, pre-foreclosure ends. The bank doesnt have to foreclose, and you walk away with no bills .
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Do I Have To Move Out Of My House When Its In Foreclosure
Generally, you do not have to move out until the foreclosure process is complete, which can take a few months or up to a year or longer. However, once your house is sold, you have to leave the property. You might have some time after the sale date to live in the home, but that timeframe varies by state. It could be a few days or a few weeks.
If you remain on the premises beyond your legal rights, the homeowner or lender will start a formal eviction process.
The Bottom Line: Work With Your Lender To Avoid Foreclosure
No one wants their home to be foreclosed upon and fortunately, before you reach that point you have many options to avoid the foreclosure process. If you ever find yourself struggling to make mortgage payments, reach out to your lender immediately to see what help they can offer you. It benefits both lender and borrower to avoid foreclosure, so never be afraid to reach out. Early and frequent communication is key.
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Contact Your Loan Servicer At The First Sign Of Problems
When you find yourself behind on your mortgage, the first thing you should do is reach out to your loan servicer. Explain why youre having trouble making your mortgage payments and ask what options might be available.
Depending on your situation and the reason for your financial woes, you might be a candidate for forbearance, which allows you to skip a mortgage payment or two and add the amount to the balance of your loan. The loan servicer might consider offering forbearance if the problem was a one-time issue and you need a bit of breathing room, provided your income and expenses are steady enough that youll likely be able to catch up.
Refinancing your mortgage at a lower interest rate might be a viable solution if you still have solid credit scores. Another option, which doesnt necessarily require high credit scores, is a loan modification, in which you stretch out the length of your loan to bring the payments in line with your monthly budget.
Foreclosure And The Coronavirus Pandemic
During this pandemic, which has created extraordinary hardship for millions of people, there are relief options available to homeowners. If you have a government-backed mortgage , youâre protected under The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. This allows homeowners to get into a forbearance program if theyâre unable to make their mortgage payments because of COVID-19. Currently, there is no expiration date for this benefit.
âForbearance is not automatic, you have to request itâdonât just stop paying your mortgage,â says Cristian Salazar, deputy director for communications at the Center for NYC Neighborhoods, a nonprofit that promotes affordable homeownership in New York. âContact your servicer and explain that you have been affected by COVID-19. Itâs critical that you make every effort to pay your mortgage until you have the opportunity to speak with your servicer.â
Stopping payment on your mortgage before speaking to your servicer could put you at risk of being ineligible for future relief, Salazar says.
Here, weâll go over the basic foreclosure process and what you can do to avoid foreclosure. Keep in mind, foreclosure procedures and laws vary by state.
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What Is A Foreclosure 4 Things Homeowners Need To Know
What is a foreclosure? When a homeowner doesnt pay his or her mortgage for an extended period, the bank or entity that lent that money takes possession of the homewhich means the current owner must move out.
Foreclosure is a scary word for homeowners, but its not all that common today: According to CoreLogic, the foreclosure rate currently hovers just under 1%. During economic downturns, like the housing crisis of 2011, foreclosure rates rose as high as 3.6%.
If youre struggling to make your mortgage payments, youll want to know what foreclosure means and how it works. Heres what you need to know.