If you’re shopping for a home, you may come across a foreclosure property. You can usually get them for a great deal, but they aren’t always as good as they seem. If you aren’t careful, even a foreclosed property can make you house poor.
Before you buy a foreclosed property, understand what it means and how the process works to make sure it’s right for you.
What is Foreclosure?
Foreclosure occurs when a borrower defaults on his/her mortgage for more than 90 days. At that point, the lender starts pre-foreclosure procedures. If the borrower still doesn’t fix the situation, the lender takes possession of the home.
Most lenders then auction the home off at a foreclosure auction or sell it as a bank-owned property with a real estate agent.
How Foreclosures Work
Some states require a judicial process to go through with a foreclosure. This just means the lender must go through the court system to make it legal.
Whether or not it’s a judicial foreclosure, though, the following occurs:
1. Borrowers miss their payments
Once borrowers miss even one payment, banks try to work with them to make it right. The last thing banks want is the home on their inventory. They want their money, not the physical home.
Banks often continue to send out the olive branch for 3 months, figuring out ways to bring you current and not foreclose on the home. If borrowers don’t respond or choose a way to get caught up, the lender will move forward with foreclosure proceedings.
2. Public Notice
The bank must make public notice of the intent to foreclose. They can do this through the court system or filing a notice with the county recorder. The notice called the Notice of Default lets the public know about the intent to foreclose on the property.
Once the lender files the Notice of Default, it’s officially in pre-foreclosure. Borrowers have approximately 90 days to get current on their loan. Usually this means paying the amount in one lump sum, but this may vary by lender.
If that’s not possible two other options include selling the property as a short sale or signing the deed over to the lender in a voluntary foreclosure. Short sales and deed in lieu of foreclosure may cause less damage to your credit score (although they will still hurt it).
Once the stated period is up, the bank will auction off the home in the hopes of selling it as-is that day. An auction sale is often known as a trustee sale and anyone can attend but they must use a real estate agent to place the bid.
The bank sets the open bid at the outstanding loan balance. But the auctioneer will keep taking bids until they’ve reached the highest bid.
The auction winner must put make a down payment (always find out the percentage required before the auction). The winner then has a specified amount of time (usually only a couple of weeks), to come up with the difference and close on the sale.
Keep in mind, in some states, the original homeowner has a right of redemption period, which may be as long as 90 days. If the original homeowner can ‘redeem’ their right in the home by paying the outstanding balance and any fees in full, they can earn their property back.
If the home sells at the auction, the original homeowners leave the home and the winning bidder takes possession.
If the home didn’t sell, which is common, the bank hands it over to a real estate agent to sell as a bank-owned property otherwise known as a real estate owned property. An REO home is already through the foreclosure process and ready to be sold.
Banks typically try to sell REO homes as quickly as possible (which makes for a great deal for buyers) because they have to pay the taxes on the home.
Should you Buy a Foreclosed Property?
Buying a foreclosed property can be a good deal for some. Just know that most foreclosures are sold as-is. That means you can’t ask for any repairs or credits for repairs. What you see is what you get. Sometimes it’s a great deal and other times, the repairs and renovations cost so much that it makes the home less affordable.
Do as much research as you can before you buy a foreclosed property to make sure it’s the right deal for you.