A foreclosure is a legal process in which a mortgage company or lien holder takes possession of a property due to default. If you purchase property and secure financing through a mortgage company, you sign documents agreeing to repay the home loan over a certain number of years. Although you’re the owner of the property, the mortgage company holds the note until you pay off the balance.
At any time during your mortgage term, the lender can foreclose if you stop making payments. However, the foreclosure process is not immediate.
Missing one or two mortgage payments will not usually initiate the foreclosure process. In most cases, mortgage lenders do not act until payments are 90 days past due. Lenders start the pre-foreclosure process at this time, in which they mail a Notice of Default to homeowners.
If you receive this notification, you’re given three calendar months to bring your mortgage current, or else risk foreclosure. You can either pay the delinquent balance plus fees, or sell the home. If you’re unable to catch up your home loan payments or sell the home during this three-month period, your lender will foreclose and take back the property.
Home foreclosures are no picnic for mortgage lenders due to the cost of reclaiming a property. But for property owners, the process can be devastating. Multiple factors can contribute to foreclosure, such as loss of employment, disability, sickness and divorce. And despite your best efforts to keep your mortgage current in a crisis, you might default and lose the property.
Mortgage lenders issue a public notice of foreclosure, which can embarrass property owners. In some cities and counties, this notice runs in the local newspaper. Additionally, home foreclosures cause significant damage to credit scores, with scores dropping as much as 200 to 250 points. With this, it’s increasingly difficult to acquire new credit cards, auto loans and even rent an apartment.
While a foreclosure remains on credit reports for a period of seven years, recovery is possible. In fact, some people who lose their homes to foreclosure can purchase another property in about three years. This is subject to maintaining perfect credit after the foreclosure and improving their credit history by paying creditors on time and paying down debt.
Although foreclosures are a property owner’s nightmare, they’re a dream for real estate investors and people looking to buy a primary residence. After foreclosing a property, the mortgage lender may auction off the property to the highest bidder. If the property does not sell at auction, the mortgage lender retains and continues to market the property for sale.
Bank foreclosures are sometimes sold below market value, which translates into an excellent deal for the right buyer. Anyone interested in buying bank-owned real estate can contact local banks and request foreclosure listings. Additionally, many real estate agents work with banks and have access to these listings. Understand, however, bank foreclosures are often sold “as-is,” in which some of these properties need extensive repairs and improvements.