Foreclosures

Mortgage Foreclosure Process – The Basics

In general terms, the mortgage foreclosure process begins when a homeowner is unable to pay the principle and/or the interest amounts on their loan. The banks foreclose on the house by seizing it and ultimately selling it.

By selling or seizing the house from the owner, the lender is able to reclaim the amount owed on the loan. Another term of endearment for this seizure is the repossession process. A foreclosure is initiated after a homeowner defaults on their loan payments. The lender then files a Notice of Default which also serves as a public notification.

Typically, the lender will assume ownership of the property with the purpose of selling it to reclaim the money lost from the loan. The lender has several options to accomplish this. They can opt for a short sale which is an agreement that is made with the homeowner in a pre-foreclosure process. Another option involves the lender buying back the property at a public auction. In bank lingo, when a lender repossesses a property, it’s called bank-owned or REO (Real Estate Owned).

Stages of the Mortgage Foreclosure Process

1. Pre-Foreclosure When a homeowner sells the property before a Notice of Default is given, it’s called a pre-foreclosure. A homeowner stands to save their credit and may walk away with something as well.
2. Notice of Default When a lender issues an official Notice of Default, they are formally indicating to the homeowner that they are facing foreclosure. This usually occurs after 3-6 months of missed mortgage payments. An official record of the Notice is filed with the County Registrar.
3. Notice of Sale An official date of sale is assigned if the loan is not brought up to date within 90 days. When this occurs, a Notice of Sale will be posted on your property in a very public fashion. Like the Notice of Default, the Notice of Sale is also filed with the County Registrar as a permanent record. And to make it a truly public matter, the Notice of Sale is posted in the local newspaper for three weeks.
4. Foreclosure Trustee Sale The time and location of the auction is indicated in the Notice of Sale. Generally, the auction takes place on the steps of the County Courthouse and the property is sold to the highest bidder. The bid must be paid in cash, though not necessarily in full at the time of the sale. A deposit is made and the subsequent amount must be paid within 24 hours. When the payment has been made in full and in cash, the winner receives a trustee’s deed to the property.
5. Foreclosure Auction At the actual auction, the lender responsible for the foreclosure places an opening bid amount on the property. This amount is typically the sum of the amount owed on the property, accrued interest on the loan and any attorney fees or extraneous fees which have been into account. Real estate investors may be licking their chops at the thought of buying up a property for a reduced price but they are in for a rude awakening. The opening bid is merely a jumping off point. If bids are not higher than the opening amount, the lender will most likely buy the property themselves.

You may be wondering why the lender wouldn’t accept the opening bid amount and wash their hands of the property. There may be a long list of suitable and PR-ready answers but in my opinion, it really comes down to their collective ego. Why should they allow someone-especially a real estate investor-to get a great bargain on a house after all the trouble they’ve gone through. The lender had to deal with the missed payments, the mortgage foreclosure process, the money lost and the hassle of putting the house on the market. They would rather keep the house, wait for the market to bounce back and make a profit!