When people stop making their mortgage payments, banks, or lenders do not take kindly to it. And that is how foreclosures come into the scene. But what exactly is this foreclosure? Foreclosure is a legal process by which lenders like banks attempt to get the buyer to pay the outstanding balance on their mortgage after they stop paying their monthly payment.
Lenders that have not gotten paid can force the sale of the delinquent owner’s house to get their money back. Foreclosure can be a complicated process for most homeowners. But as a person who will purchase a foreclosed property, it can be an opportunity to buy a house at a lower price.
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How does it work?
The exact process differs from city to city or state to state, but here are the basics. First and foremost, borrowers fall behind on their mortgage payments. When that happens, lenders usually provide the borrower with a chance to pay the balance in the form of the grace period.
During this time, lenders might agree to various payment schemes to help the homeowner the time to pay the balance and get back on track. Providing the homeowner, a grace period is in the lender’s best interest since foreclosure is a costly process that costs a lot of money from both financial institutions and borrowers.
If, after the grace period, the borrower still cannot make the payments of their balance to the lender, they can be served a default notice. Usually, it gives the homeowner 90 days or three months to make payment or risk having their properties seized. If the homeowner does not come up with the money, lenders can move forward on selling the property to recoup the outstanding mortgage balance.
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Purchasing a foreclosed property
People interested in purchasing a foreclosed house can do so at auctions, online, or courthouses. Individuals interested in participating in these foreclosure auctions need to register in advance, but these opportunities are open to everyone. Foreclosed properties that are sold at auctions usually have to be paid by the buyer in cash.
They do not always need to come up with the total price at the time of the auction, but this is a requirement in most states. When it is not a requirement, a certain amount is required for a down payment, with the remaining balance to be paid afterward—as such, purchasing foreclosed properties at an auction is not an option for buyers that needs financing to purchase a house with an active mortgage.
A delinquent property that does not sell at these auctions become owned by the financial institution, usually the bank. At this point, the process of purchasing a foreclosed house is similar to the process of purchasing a regular property. Buyers can search for foreclosed home independently or through their real estate agent and make a reasonable offer. There is a big chance that cash offers will be approved, but it is possible to finance a lender’s property through a mortgage.
Avoiding foreclosure
One of the biggest questions most people ask is, what is a foreclosure? That is why they need to know how to avoid it. Homeowners who cannot keep up with the mortgage payments need to exhaust all the available options before resigning to foreclosure. It stays on the homeowner’s credit history for seven years, and it can cause a decent credit score to dive overnight. Borrowers who failed to pay the mortgage on time need to contact their lenders or the bank and ask for relief, like:
Refinancing the house to lower the interest rate
Forbearance (when the bank or financial institution lets the borrower freeze the payment), or loan modification (when the lender or bank alters the borrower’s terms of the mortgage), it is a lot easier for them to manage).
When the options mentioned above fail, selling the property is usually the next best option. Borrowers who are not under the red line on their mortgages can go after a traditional house sale, but people who owe more on their home mortgage than the actual worth of the property need to ask the bank or financial institution to approve a short sale.
If lenders refuse to agree to provide a quick deal, foreclosure is usually the only option. Property owners need to avoid foreclosure at all costs. And although it may be a promising option to purchase a foreclosed house, they are usually best reserved for seasoned real estate investors with tons of knowledge of the process and have easy access to spare cash.