In simple words, foreclosure is the process when a lender tries to legally recover the balance due to him if a borrower or homeowner is no longer making or unable to make the due payments. This is usually done by repossessing the property through the sale of the collateral provided against the loan or mortgage. The lender may also choose to seize the property which is under dispute, and auction it off to recover the outstanding payments.
Jeff Adams #1 Real Estate Trainer breaks down the 3 phases of foreclosure to help you understand.
Phase 1 – Pre-Foreclosure
A borrower is legally required to be more than 90 days overdue on the payments before a lender can initiate a legal foreclosure process. This could mean that if less than 3 payments have been missed, the borrower may not be in foreclosure. Sometimes lenders may choose to wait for a third or fourth missed payment before sending a legal notice of default.
This notice is then considered a public record and the homeowner is expected to revert to the notice or clear the dues. The lender and homeowner may decide upon a pre-foreclosure sale to help clear the outstanding payments. The pre-foreclosure stage can be considered as a grace period given by the lender to make an easier settlement. In many cases, many homeowners prefer to settle the case in the pre-foreclosure stage to avoid further legal action.
Phase 2 – Foreclosure
If the payments are not cleared during pre-foreclosure, the case moves into the foreclosure stage. Most lenders provide a sufficient grace period during which the homeowner is expected to make arrangements. But in case if the payment hasn’t been resolved three months after the default notice has been sent, the foreclosure is initiated. The lender then sets a date and time for a public auction on the property. The homeowner may come up with the dues and clear the payments right up to the moment of auction under his ‘Right to Redemption’.
If the home is sold in a real estate auction, the money collected is used to pay off all debts including the mortgage amount, the foreclosure costs, late fee charges, taxes as applicable and so on. If there is any amount left over after the compensation, it is given back to the homeowner. If the full amount is not met, the lender can hold the homeowner responsible for not meeting the payment requirements.
Phase 3 – Post Foreclosure
If the auction is unsuccessful because of a lack of bids or low bids, the property is seized by the lender and it becomes ‘bank-owned’ real estate, (REO). It is then put back on the market through real estate brokers or may be sold off by the lender at a real estate liquidation auction.
NOTE: The foreclosure procedure may differ from state to state, but follow a basic similar structure as mentioned above. For any more information or queries regarding real estate, real estate investing, foreclosures and how to be successful as a real estate investor in 2015, Jeff Adams is here to help.
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