The Foreclosure Process: A Brief Synopsis
Foreclosure is not a single isolated event, rather an ongoing process culminating in the repossession of property. When a person obtains a loan to purchase a home, two important documents are signed. The first is a note, which describes the obligation to repay the loan; the second is a mortgage or deed of trust contract, depending on State law, which gives the lender a legal right to the home in case the buyer fails to fulfill their repayment obligation. A lender would never consider giving the homebuyer a loan without using the home purchased as collateral to secure the loan. Unfortunately, not all homebuyers who sign a mortgage or deed of trust contracts can make their loan payments. Most mortgage or deed of trust contracts allow a grace period of about ten to fifteen days after a payment is due, before a penalty is added to the payment and the loan is considered delinquent. The loan is in default when payments are three or more months behind. At this time the homebuyer is notified of consequences for not keeping up with expected loan payments. Taking possession of collateral or repossession of the house involves procedures dictated by the particular State laws where the property is located. This process is called foreclosure.
The following is a quick six-step synopsis of a typical foreclosure timeline:
Step 1: Late Payments
When a borrower makes a late payment, the lender adds penalties, and with the extra fees added to the regular monthly payment amount, it gets increasingly difficult to come up with the payment. For many homeowners this creates a snowball effect, and a late payment becomes a missed payment. The borrower misses a payment and is now considered delinquent on the loan. Generally, the payment is considered officially late after the 15th day. At this point the lender will generally send a late payment notice or call the borrower and ask when payment can be expected.
Step 2: Missed Payments
As soon as a borrower misses a payment, their written contract with the lender is broken and they are in default. If a borrower continues to be delinquent the lender will send a “demand” letter by certified mail somewhere between day 45 and 60. The letter notifies the borrower that the mortgage contract is breached. This is the first time that foreclosure is officially stated. The demand letter will inform the borrower of the steps needed to stop the process at this point. Around 90 days the lender’s lawyers or foreclosure representatives may start filing court papers and recording a legal notice of the foreclosure status. The procedure at this point depends on State foreclosure laws.
Step 3: Talk To Your Lender
Lenders do not like to repossess property. It is bad for their business. Statistics show that each time a mortgage company forecloses on a home; they lose as much as 50 percent of their investment. A delinquent borrower should talk to their lender and work together to get back on track. Cutting off dialog with the lender only invites disaster. If the borrower promptly makes their payment, plus fines and penalties, foreclosure proceedings can often be stopped. The borrower’s credit will suffer a blemish, but they will avoid more severe repercussions.
Step 4: Avoid Foreclosure
Even after the foreclosure process begins there is a period of time when the actual sale of the property can be avoided by paying the past due amount and any added fees. The reinstatement period is the time between the start of the foreclosure process until the time of the auction. If a homeowner can’t come up with the money to “cure” the foreclosure, they may be able to sell the house before foreclosure, as a last resort. This way they will lose the house and whatever equity they have accumulated, but at least they can save their credit from ruination. If the homeowner is unable to sell the home before the date of the auction, depending on the State they live in, the homeowner loses their right to the home and must vacate the premises.
Step 5: Foreclosure Auction Sale
Legal notices are posted at the courthouse or in local newspapers to announce that the lender intends to sell the property at a public auction. Anyone can attend the auction and bid. The house is sold to the highest bidder. At most auctions the lender is the successful bidder on the property. The lender may bid a specific dollar amount or simply present the debt owed as the bid amount. The winning bidder receives the property in the same legal condition the property was in before making the mortgage. The foreclosure auction represents a great opportunity for investors because foreclosures are usually sold below market value. Even amateur investors can buy homes from a foreclosure auction and people find exceptional bargains by buying these distressed properties.
Step 6: Real Estate Owned (REO)
If the lender does not get a satisfactory offer, or they are the highest bidder at the auction, the home becomes property of the lender and is sold through a real estate broker or property management company. These post-auction listings are called REO homes (Real Estate Owned). REO homes are usually sold at very competitive prices. Some of the best values in the foreclosure market can be found in REO inventories.