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What Are Real Estate Foreclosures? When a person borrows money from a bank or other lender to purchase a piece of property, he or she must promise the property as collateral on the loan. A foreclosure occurs when a bank or other secured creditor sells or repossesses a piece of real estate property because of the owner’s negligence of those bank payments. Essentially, a foreclosure is the legal action the bank or lender takes to force the owner to make payments or lose the house in a public auction. When a loan is sought for the purpose of purchasing real property- either undeveloped land or a home, either for investment purposes or as a principle dwelling – security for repayment of the loan takes the form of a legal document known as a mortgage. In order to obtain a mortgage, the prospective buyer must come up with the amount of money required by the seller for a down payment on the property. The buyer must have appropriate credit to qualify for a mortgage and must fill out a number of documents in an attempt to prove that he or she is credit-worthy. When the buyer is approved and a mortgage is granted, the buyer agrees to pay a specific monthly mortgage payment to the lender – usually a bank but sometimes an individual seller. The buyer must make the mortgage payment on or before a specific date each month. If three consecutive mortgage payments are not made, foreclosure proceedings are usually instituted by the lender. There are several reasons why the buyer may be unable to meet his mortgage obligations such as job loss, credit problems or unexpected medical expenses. The mortgage or lien guarantees by law that if a borrower is unable or unwilling to meet his obligation of loan repayment, the lender is legally entitled to reclaim the property. The legal term for this reclaiming procedure is called a real estate foreclosure.
Foreclosure is initiated by a court action and usually means that the property will be sold. In the case of an individual lien holder, as opposed to a lending agency such as a bank in most cases, the individual will either sell or reclaim the property. To begin foreclosure proceedings, the lien holder must petition the court to disallow the borrower’s right to possess the property. A Judicial procedure follows in which the court requires the lenders to prove default – meaning lack of payment of the mortgage. If default can be proven, the court will begin foreclosure proceedings. An exception to this rule exists in some states which use Deeds of Trust instead of mortgages. Foreclosure in those states do not require a court filing. As a result
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Foreclosure informationIn all cases, the buyer is given a limited period of time in which to cure or satisfy the default – which means to make the necessary mortgage payments which are in arrears. If the buyer can make payments for the unpaid amount, he or she can then stop the foreclosure proceedings. If the buyer is unable to satisfy the default or sell the property prior to final foreclosure, the property then reverts to the lender. Some buyers have been known to make no effort to make their mortgage payments and are said to “walk away” from the property. The consequences are that they lose the down payment and credit for all mortgage payments made in a timely manner. In addition, the foreclosure is listed on all credit reports and of course, has a negative effect on any possible future requests for credit. If the property has been insured by a Federal Agency such as HUD, Fannie Mae or the Veterans Administration, these agencies will reimburse the lenders and will take ownership of the property, which will then be sold at auction.
You can get into a foreclosure for various avoidable and unavoidable reasons. The most common causes of foreclosure are divorce and unemployment. Since divorce usually ends with one person moving out of the home, the other person is often left to have sole responsibility for the mortgage payments. Unemployment also can make a homeowner more susceptible to having a home foreclosed. Obviously, a lack of income can make mortgage payments rather burdensome. Serious illness and death are other reasons for a possible foreclosure. How do people get into a foreclosure situation? The answer usually is a simplistic one: the homeowner’s finances are stretched too far and he or she cannot afford to make the mortgage payments. Maybe the cause is illness, perhaps a job loss and inability to get another job or one that pays enough to meet financial obligations. Maybe a bitter divorce? Perhaps a substance abuse or gambling problem? Some people are intimidated by the foreclosure proceedings. They just walk away, leaving behind any chance to rescue their home from foreclosure and thereby seriously impacting their credit rating. If the default is still at a curable stage, the lender may be willing to offer some relief by offering to allow the borrower to pay interest only for a period of time – if there is any indication that the borrower may be able to resume regular interest plus principle payments within a reasonable period of time. Basically the bank is not interested in reclaiming real estate. Firstly, the action of foreclosing shows up on bank records as a bad loan. Banks do not like may of those entries on their books. Secondly, the bank will then sell at foreclosure to the highest bidder through a foreclosure trustee, selling at a price as near as possible to the monies still due on the loan. This is most often a price below actual market value of the property. The bank certainly would prefer the original loan to run its fifteen or thirty-year course which would be far more suitable profit-wise. If the besieged homeowner manages to improve his or her financial situation before actual foreclosure, the lender in most situations will be a willing participant in arriving at a workable solution, particularly if the homeowner’s past payment record has been good. Frequently, homeowners who are now able to pay the mortgage but are still in financial difficulties because of arrears of past due unpaid mortgage payments will be allowed to make up the past due amounts by adding an additional sum to the regular monthly mortgage payment. This is usually one-half of the monthly mortgage payment. If this puts the owner back into a difficult position, the lender may allow interest-only payments on past due sums added to the monthly payment if there is the likelihood that the homeowner’s situation will improve in the near future to the point where he can add full monthly arrears payments to the usual mortgage payments. A lesson to be learned by all of this is if there is a possibility of not being able to make the mortgage payments due to a sudden downturn in earnings, be sure to contact the lenders immediately to notify them of your predicament and if possible, give them some indication of your plan to better your situation. If you want a workable relationship with your lender, be sincere and not evasive. Do not wait until you get a “missed payment” notice in your mail. Keep in mind that lenders are not anxious to foreclose. Then again, if there is no workable solution possible in the immediate future, it is best to sell the house in order to rescue some of your invested funds and avoid a negative impact on your credit rating. Trying to save the house at all costs when a foreclosure is imminent does not make any sense.
Real Estate Foreclosure Process There are two types of foreclosures in the United States. They are “strict foreclosures” and non-judicial foreclosures. Under “strict foreclosures,” the bank claims the title and possession of the property. Then, the property is put up for auction by the county sheriff or some other officer of the court. Next, the sheriff or officer of the court issues a deed to the highest bidder at the auction. In a non-judicial foreclosure, the mortgagee (one that holds the mortgage) or the mortgagee’s attorney notifies the homeowner of their neglect and the mortgagee’s intent to sell the property. If the homeowner does not make the payments or use other lawful means (such as filing for bankruptcy), the mortgagee will have a public auction. In both these cases, a notice of default is issued. A real estate foreclosure is a legal process whereby a loan covering real property that is in default is “called in” by the lender, who then takes the collateral pledged by the buyer – which is undeveloped land, a home or a commercial building – for the purpose of regaining the money owned and unpaid by the buyer. In order for the lender to be able to take possession of the property on which the mortgage is in default, the lender must petition the court for approval to do so. After the lender has shown “just cause” to the satisfaction of the court to prove at least three months of mortgage payments were not made, an official Notice of Default is filed. Notice is then published in a local newspaper. This Notice is to be repeated weekly for a period of three months. During this period of time, the borrower may stop the impending foreclosure by satisfying the default. If no action is taken by the borrower during the time allowed to halt foreclosure proceedings, the trustee will publish a Notice of Sale. In accordance with the law, Notice of Sale must be published weekly for a period of three weeks. Throughout this period of time and up to the actual auctioning of the property, the borrower may still stop the proceedings by curing the default. Once the trustee initiates the sale, the property is offered to the highest bidder. If no acceptable bids are received or no bidders present, the property will revert to the lender which can be either an individual or lending institution. The lender, now in possession of the property, can make arrangements – usually through a real estate broker – to sell the property- even though the prior owners have not yet moved out. If a property is encumbered by more than one mortgage, the primary or first mortgage holder dictates the acceptable sales price. This can mean that the original or senior lender can accept an amount sufficient to pay off the loan regardless of market value. This can leave the second (or junior) mortgage holder or holders out in the cold. On the other hand, second mortgage holders may attempt to rescue their investment by themselves purchasing the property from the senior mortgage holder and thus, will have the opportunity to resell the foreclosed property at a profit.
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