According to the “U.S. Foreclosure Market Report,” 1 in 69 homes across the United States were in some stage of foreclosure or owned by a bank in 2011. While this is a distressing statistic for many homeowners, it can have a positive spin for transferees looking for inexpensive, yet impressive, housing.
However, it’s important to understand the process – and the risks – associated with purchasing a home that’s bank-owned.
A mortgage can be foreclosed upon in two ways – judicial and non-judicial. Whether either or both processes are available depends on the state where the property is located. Judicial foreclosures are brought to court. Non-judicial foreclosures are not in court, but are sales held outside of the courtroom – usually by a trustee or the local sheriff.
A judicial action is more complex and time consuming, with court dates to be scheduled, testimony to be heard, evidence to be submitted, appeals, the time and schedule of the court and attorneys, and so on. Typically, the non-judicial process isn’t nearly as complex and time consuming because the borrower doesn’t have the opportunity to present a defense to the foreclosure in court. These types of foreclosures happen much more quickly.
Additionally, there are four stages to the foreclosure process:
- pre-foreclosure, pending foreclosure sale or short sale
- purchase at the foreclosure sale
- purchase from the lender after a foreclosure sale
- purchase from the third-party buyer at the foreclosure sale
Where the seller is in the foreclosure process can add unique issues to the purchase of the home. When you’re relocating and looking at homes, always use an attorney to help you navigate the difficult and tenuous road to buying a foreclosed property.
Here are some common issues to note:
Pre-foreclosure: Typically, the seller is in a tough financial situation and is looking to sell the property to avoid foreclosure. If the foreclosure hasn’t yet started, there’s no issue. But, if the foreclosure is in process, the lender must dismiss the action (if judicial) or cancel the sale (if non-judicial). The lender will add any costs that may have incurred in the foreclosure to the payoff amount.
Very often, these properties are considered “underwater,” meaning the amount owed to the lender exceeds the market value of the property. In that situation, the only way to sell the property would be to get the lender to agree to a short sale. That means that the lender agrees to take less than it’s owed to release its mortgage and allow the sale to go through.
Another issue may be that the seller has filed bankruptcy to obstruct the foreclosure. If this has happened, the sale may be handled through the bankruptcy court action, or at a minimum, the bankruptcy case will need to be dismissed before moving forward.
Purchase at the foreclosure sale: Typically, non-lenders (i.e. the average homebuyer) aren’t successful bidders at a foreclosure sale.