What You Need to Know About Homes in Foreclosure
Foreclosure is the legal process where a lender or mortgage investor takes back unpaid property. Homes in foreclosure have low prices as compared to other homes because the price is set by the lender who needs to get their money back as soon as possible and also has fewer title concerns since the bank validates all legal documents.
When people take up a mortgage they are always in a position to honor the payments since the lender also verifies that. However, life challenges are unpredictable and one can find themselves on the defaulter's list. In this case a foreclosure.
Foreclosure happens when a borrower fails to pay the mortgage and the lender is forced to repossess the home or when a homeowner has failed to pay taxes or homeowners association fees.
A buyer needs to know why people enter into foreclosure and what to consider when buying a foreclosed home before a purchase is done.
There are three terms one needs to understand in foreclosure.
- Foreclosure is the legal process where a lender or mortgage investor takes back unpaid property.
- Home in foreclosure refers to a home or property going through the foreclosure process.
- Foreclosed home or REO (Real Estate Owned) is a home or property that has already gone through the process of foreclosure and is now under the ownership of the lender. It is also known as real estate-owned property.
The foreclosure process involves;
- Payment default and notice of default: When a homeowner fails to pay at least one payment they get a payment default. A notice of default is then given from the lender or bank after 90 days of missed payments. Timelines always vary depending on the agreed contract and sometimes a defaulter is given an option of working out new payment terms.
- Notice of trustee’s sale: If the defaulter fails to respond to the notices or work out new terms, the lender or bank then puts up the property for sale.
- Trustee’s sale: At this stage, the lender attempts to sell the property through a public auction.
- Real estate-owned: Sometimes the bank fails to sell the property and therefore takes ownership as they try to get a buyer. This is now the stage where people looking for foreclosed homes can buy.
Before buying a home in foreclosure, you will need to;
- Understand the options
A foreclosed home can be bought in an auction, from the bank after a failed sell in an auction, or through a short sale.
Buying at auction is the fastest way to acquire a home. You will need to have the cash at hand for the purchase or verified approvals for a mortgage. When you purchase a home at an auction it means you have agreed to buy the home as-is without an inspection.
When buying from the bank you completely don’t deal with the homeowner. The bank takes charge of all the processes and evicts the homeowner in preparation for the new occupant. Despite the fact that the home will be sold as-is, you are allowed to do an inspection before the final agreement and mostly with the help of a real estate agent.
In a short sale, the homeowner sells for a lesser amount than the mortgage. In this case, it’s the bank that has to approve your offer and not the homeowner and it can take a long period of time before the approval is done.
- Get a real estate agent
In most cases, banks hand over foreclosed homes to real estate-owned (REO) agents who now liaise with the other real estate agents. A real estate agent helps one in running through the processes.
- Find foreclosed homes for sale
The services of a real estate agent include finding homes in foreclosure. However, one may also want to do their own search.
- Get preapproval for a mortgage
In case you need a mortgage to fund your purchase get a preapproved loan. This will give you an idea of how much you can get for a home loan.
- Find appraisal and inspection
An appraisal has information on the worth of the property and lenders will need to know that they are giving you the right amount of loan for the home and not an exaggerated figure while inspection requires someone to visit the home and get all the details on the condition of the home including repairs to be done.
- Purchase the Home
The appraisal and inspection will inform on whether to buy or not to buy the home. If you decide to buy, work on getting the mortgage and close the deal. You can now go ahead and renovate the house as desired.
Homes in foreclosure have low prices as compared to other homes because the price is set by the lender who needs to get their money back as soon as possible and also has fewer title concerns since the bank validates all legal documents. However, the disadvantages are;
Maintenance: there is no guarantee that a home in foreclosure will be in good condition. This is because the owner had no intentions of selling and therefore didn’t have it prepared for sale. You will therefore have to incur costs in cases where repairs are required.
As-is sales: the main purpose of the sale is to get the money back. Therefore, in most cases, the bank will put up the house for sale in its current state.
Repossession: A house is listed under foreclosure because the owner is unable to pay a loan. However, if they can be able to pay up before the redemption period elapses, they can get back their home.