Examining the Foreclosure Process
While most consumers are familiar with the term foreclosure, very few have a solid understanding of how the process works. The purpose of this chapter is to provide an easy to follow overview of the foreclosure process. Whether you are a first time homebuyer or a real estate investor, it is important that you have a complete understanding of the foreclosure process before you invest your money in this unique market. While different states require different foreclosure procedures, the basic process is the same for all states.
Foreclosure: Foreclosure is the legal procedure that a lender initiates to reclaim ownership of property after the borrower fails to make payments according to the terms of a loan. The foreclosure procedure essentially terminates the rights that the borrower was granted through a mortgage or deed of trust. This process gives the lender the legal right to take the property title away from the borrower so the property can be sold and the lender can recapture its loan proceeds.
Judicial Foreclosure and Non-Judicial Foreclosure: Depending on the specific state of the defaulted loan, the process will be either a judicial foreclosure or a non-judicial foreclosure. The key difference between these procedures is the length of time it takes a lender to foreclose on a defaulted loan. In a judicial procedure, it takes the lender approximately 12 - 18 months to foreclosure compared to only 4 - 12 weeks in a non-judicial procedure.
States supporting judicial foreclosure issue legal instruments called mortgages while states with non-judicial foreclosure issue deeds of trust. The mortgage process takes longer since a lender must initiate a judicial procedure through the courts to obtain a judgment allowing the foreclosure and sale.
By contrast, a default on a trust deed does not require lengthy court action since the title remains with the lender until the loan is paid in full. Additionally, the lender has the power of sale which allows the trustee to sell the property more quickly and thus recover the lender's collateral in a timely manner.
The procedural difference in mortgage and trust deed foreclosures is provided below.
Trust Deed Foreclosure: There are three principal parties involved in a trust deed foreclosure. The three parties are (1) The lender (2) The borrower (3) The trustee who is an independent third party holding title to the property until the loan is repaid in full. When the borrower fails to make the required payments on the loan, the trustee simply records a Notice of Default, sends a copy to the borrower, and after a specified holding period, a Notice of Trustee Sale is posted on the property.
When searching for properties through Realtystore.com, properties with a Notice of Default are categorized as Preforeclosures; and properties with a Notice of Trustee Sale are categorized as Foreclosure Auctions properties.
The Notice of Trustee Sale is advertised to the public for a required period and if the borrower does not bring the loan current, the property is auctioned to the public.
Mortgage Foreclosure: A mortgage is a legal contract in which the borrower secures a loan by using the property as collateral. When the borrower fails to make payments, the lender is forced to take legal action to collect the amount due. The lender will typically send multiple notices to the borrower requesting information about the missed payments in an attempt to work with the borrower to bring the loan current. When these efforts fail, the lender will hire an attorney to initiate foreclosure.
At this stage, the attorney will file several legal documents including a lis pendens, which is a public notice indicating legal action is pending on the property. If the borrower fails to respond to the complaint, the attorney submits a report to the court with the facts of the case. The judge will then issue a Judgment of Foreclosure and Sale in favor of the lender. At this stage, an auction sale is advertised according to the local statutes.
Opportunities to Purchase Foreclosures: You should now understand how a property ends up at auction through the foreclosure process. We will now turn our attention to purchasing foreclosures during the three different stages of the process. The three stages are as follows:
(1) Before Foreclosure Auctions (Preforeclosures or Notice of Default properties)
At this stage the owner has defaulted on his loan and in many cases would like to find alternatives to avoid foreclosure and the resulting damage to his credit history.
(2) At Foreclosure Auctions (Auction or Notice of Trustee Sale properties)
The property owner has defaulted on his loan and has been unable to bring the loan current. Unfortunately, at this stage the owner is out of time and the property will be sold at a public real estate auction to the highest bidder.
(3) After Foreclosure Auctions (REO Properties, Bank Foreclosures or Government Repossessed Homes)
If the minimum bid at an auction is not met, the ownership rights of the property are transferred to the lending institution that provided the loan. In general, banks are eager to sell these properties so they can get the money back on the defaulted loan and issue a new loan. When ownership transfers to a government service enterprise, for example if the properties become HUD homes or VA foreclosures, the government will also be an eager seller so they can recoup their investment.