What is Foreclosure?
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. The foreclosure process can end one of four ways:
- The borrower/owner pays off the default amount to reinstate the loan during a grace period determined by state laws. This grace period is also known as pre-foreclosure.
- The borrower/owner sells the property to a third party during pre-foreclosure. 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 pre-foreclosure.
- The lender takes ownership of the property, usually with the intent to re-sell. The lender can take ownership through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction. These are also known as bank-owned properties.
The foreclosure process represents three bargain-buying opportunities.
Pre-Foreclosure (NOD, LIS):
Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property. The borrower/owner can walk away with something to show for any 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.
Auction (NTS, NFS):
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 borrower/owner.
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 want to re-sell the property to recover the unpaid loan amount. The lender will probably make sure the title is clear for any buyer, but the potential bargain is typically less than a pre-foreclosure or auction property.
Before You Buy?
You'll need to make sure you're armed with the resources you'll need to buy foreclosed properties.
Tip: Start a file to organize all the documents and research that you'll accumulate during the process of searching for and buying a foreclosure or pre-foreclosure property.
Find a data source for properties
Thanks to the advent of the Internet, you no longer have to visit the local courthouse each day to compile the property information yourself or wait for the property information to be mailed to you. RealtyTrac, the leading online marketplace for foreclosure properties, has a daily updated database of more than 550,000 pre-foreclosure, auction and bank-owned properties. RealtyTrac also provides tools and resources to help buyers and investors pursue property.
You can check if there are any pre-foreclosure, auction or bank-owned properties in your area. Simply go to RealtyTrac?s Free Property Search page and select the state and county or city or zip code and click ?Begin Search.?
Check your credit
Check your credit and correct any credit problems you may have before applying for financing.
Applying for financing not only provides an estimate of what you can afford, but it enables you to move quickly once you locate a property that interests you. When you approach a borrower/owner or a foreclosing lender about a property, pre-qualification will demonstrate that you are a serious buyer and are ready to buy quickly.
Contact an Agent if needed
If you're a first-time homebuyer and you've never purchased a home, let alone a foreclosed property, it is beneficial to contact a local real estate agent who can guide you through the process of buying a foreclosure. If you work with an agent, make sure they know your priorities. Not all agents have much experience with foreclosed properties, so ask any potential agents if they have experience with foreclosures.
Make a checklist of what you're looking for in a home
Your foreclosed property checklist should include as many factors as you can in order of their importance to you. You may not ever get the perfect home, but a checklist will help keep focus so you'll know when you find a property that matches your most important wants and needs.