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No one wants to think about losing their home. Even if you don’t own a home yet, just seeing the word “foreclosed” in real estate listings might make you nervous. Whether you’re in the general market or specifically looking at foreclosed homes to buy, it’s important to understand exactly what foreclosure is and what happens to houses and homeowners when the foreclosure process begins.

What Is Foreclosure?

Foreclosure happens when a borrower fails to pay their mortgage payments and the lender or mortgage investor must repossess and then sell the home. Foreclosure can also happen when the homeowner fails to pay their property taxes or homeowners association fees.

When it comes to understanding foreclosure, there are three important definitions to know:

  • Foreclosure: the legal process in which a lender or mortgage investor takes back unpaid property
  • Home in foreclosure: a property going through the foreclosure process
  • Foreclosed home or REO: a property that has gone through the foreclosure process and is now owned by the lender or bank, also known as a real estate-owned property (REO)

Foreclosed homes and REOs are usually of particular interest to buyers, since these properties typically come at a lower price than comparable, non-foreclosed homes.

How Foreclosure Works

After the foreclosure, the mortgage lender will take control of the property and attempt to sell it to recoup the money it lost from the mortgage default. The lender is allowed to take back the home because a mortgage is a secured loan. That means the borrower guarantees repayment by providing collateral. If they can’t pay back the loan with money, they use the collateral instead.

In the case of a mortgage, the home is used as collateral and, upon signing closing documents, the borrower recognizes that the lender has the right to foreclose on the home if they default on the loan. This is also known as putting a lien on the title of the home. Once the mortgage is paid off, this lien on the title of the home is removed.

Why Do Homeowners Go Into Foreclosure?

At the time of getting their mortgage, most people are typically in a position to successfully make payments on their loan. And most lenders ensure this by verifying income, reviewing credit history and putting a limit on the borrower’s debt-to-income ratio (DTI). But despite all of these assurances, things don’t always go as expected, and there are a number of reasons a homeowner may fail to make their payments.

Unforeseen Circumstances

Many times, a person facing foreclosure has experienced a life event that changed their financial circumstances. Because of this, they can no longer afford their monthly payment. Examples of such events include:

  • Loss of employment
  • Taking on excessive debt
  • Experiencing a medical emergency
  • Incurring a large, unexpected expense
  • Losing part or all of their income due to divorce or death
  • Experiencing an increase in living expenses
  • Relocating before selling the home
  • Experiencing distress from a natural disaster

Increased Mortgage Payments

It isn’t just a hardship that causes homeowners to go into foreclosure. It could also be something as simple as an increase in their mortgage payment. For example, those with an adjustable-rate mortgage may have an increase in interest, which will raise their mortgage payment. Or, if there is an escrow shortage due to a rise in property taxes or insurance premiums, the escrow payment will increase. And since property taxes and homeowners insurance are typically paid through the monthly mortgage payment, the monthly payment will rise as well.

These instances are not uncommon with mortgages, and they depend on the terms of the mortgage in question. However, homeowners who don’t understand their mortgage terms may be caught off guard and unprepared for even the slightest change.

Underwater Mortgage

While most homeowners go into foreclosure because they cannot make their mortgage payment, some enter into foreclosure because they intentionally miss their payments. This often happens when their home is underwater and they no longer have any financial motivation to continue to pay their mortgage.

When a home is underwater, the amount owed on the mortgage is more than the home is worth. When they no longer have equity, some homeowners see no reason to continue making their payments. Instead, they “walk away” from the home, leaving the lender to deal with it.

The Foreclosure Process

There are two types of foreclosures:

  • A judicial foreclosure involves going through a court and allows the homeowner to contest the foreclosure.
  • A nonjudicial foreclosure does not require court action. The type of foreclosure and the process it uses will differ from state to state.

Whatever the type of foreclosure and whatever the state, the process generally involves five stages.

Stage 1: Missed Payments

No matter the reason a homeowner goes into foreclosure, the process begins the same way: with missed payments. Once the homeowner begins missing payments, they are no longer upholding their responsibilities of the loan, and the lender can come to collect.

What many homeowners don’t realize is the foreclosure process can be expensive for the lender, so they will want to avoid foreclosure, too, if possible. In most cases, lenders are willing to work with the homeowner to restructure the loan and lower or delay payments. If the homeowner needs additional assistance, they may find it through:

  • Foreclosure mediation
  • HUD-certified financial counseling
  • Government mortgage relief programs
  • Home loan modification programs

There are steps you can take to avoid foreclosure. If you are a Quicken Loans® client and need assistance, please call our customer service number at (800) 508-0944 so we can go over your options to help you get back on track.

Stage 2: Public Notice

Once the homeowner misses 3 – 6 months’ worth of payments, the lender will give a public notice or file a lawsuit with the court. Also called a Notice of Default (NOD), or lis pendens (suit pending), the public notice is a written notification to the homeowner that the lender will pursue legal action if the debt is not paid.

Stage 3: Foreclosure

Once the lender records the public notice, the foreclosure stage begins, and the home enters the early stages of repossession. At this point, the homeowner typically has 90 days to take action. If they want to avoid a foreclosure sale and avoid eviction, they have a few options:

  • Reverse the default by paying the outstanding balance
  • Sell the property because there is equity to complete a full pay off of the loan.
  • Sell the property in a short sale before it goes to foreclosure
  • Sign the deed over to the lender through a deed in lieu of foreclosure

The Short Sale Option

A short sale is a voluntary sale of the home before foreclosure. It is called a short sale because the sale price usually comes up “short” of the balance owed. When that happens, all of the proceeds from the sale go to the lender and the sale cannot happen unless the lender approves it.

A short sale is usually preferable for both the homeowner and the lender because:

  • It will be less damaging to the homeowner’s credit and ability to obtain another mortgage in the future.
  • It will help the lender recover as much of the loan balance as possible while avoiding the cost of a foreclosure.
  • If the sale price is more than what is owed, the homeowner will get to keep whatever money is left after the mortgage is paid off.

The Deed In Lieu Of Foreclosure Option

Another way for both parties to avoid foreclosure is with a deed in lieu of foreclosure. In this transaction, the homeowner voluntarily signs the deed over to the lender or bank and is released of all mortgage obligations.

Again, by avoiding foreclosure, the homeowner’s credit and mortgage eligibility may take less of a hit. The lender may benefit by avoiding the costs and additional time involved in the foreclosure process. However, it may only approve a deed in lieu of foreclosure if the homeowner cannot sell the home in a short sale and there are no other liens on the property. Even then, the lender may not accept this offer.

If the homeowner cannot sell the home in a short sale, make up the late payments or pursue a deed in lieu of foreclosure, the home will then go to public auction.

Stage 4: Auction

When the time comes, the mortgage investor or its representative, the trustee, will put the home up for auction. Also known as a foreclosure sale, the auction is open to the public and will often take place on the steps of the county courthouse, in a conference room or convention center, or even online. Before the auction, a Notice of Trustee’s Sale (NTS) will notify the homeowner and the public of the auction and provide such information as a date, time and location.

Since the mortgage investor, terms of the loan and specific state guidelines control the policies of the auction, every auction will be different. However, you can expect similar processes and requirements.

At the auction, the minimum bid is normally set at the balance owed on the loan, and the foreclosed home is sold to the highest bidder. That person must pay cash for the full amount or a significant deposit immediately. Though the highest bidder is the winner of the auction, they may not necessarily win ownership of the home. In some states, the previous homeowner has a “right of redemption” that allows them to buy their home back even after it is sold at auction. Typically, they will need to pay the sale price or full loan balance, plus any interest and costs the bank incurred during the process. Depending on the state laws and the method of foreclosure, a homeowner’s right of redemption could be valid up to the time the court clerk files the certificate of sale, or as long as 1 year after the sale.

Stage 5: Post-Foreclosure

If the home was purchased at auction, the previous homeowner must move out of the home, and the new homeowner can do with the home as they please. Some people move into the home as their permanent residence while others rent out or sell the home and make a profit.

Oftentimes, the home does not sell at auction because the mortgage investor does not approve any bids or the pool of buyers who can pay cash is limited. When this happens, the foreclosed home becomes a bank-owned property, also referred to as a real estate-owned property. As stated before, an REO is not the same thing as a home in foreclosure. A home in foreclosure is going through the process of being repossessed by the bank, while an REO is a home that has already been repossessed by the bank. In an REO, the bank is the sole owner of the property.

As the owner of the property, the bank must pay property taxes on the home. Add that to the costs incurred during the foreclosure process and the money lost during default, and it’s easy to see why the bank will want to get rid of the REO home as soon as possible. However, a motivated seller doesn’t always mean the home will sell for dirt cheap. Keep this in mind when buying a home in any stage of the foreclosure process.

What To Know Before Buying Foreclosed Properties

It can be hard to pass up a good deal, especially when it’s on a large purchase like a home. That’s why many home buyers turn to foreclosed homes in hopes of getting more space in a better area and with a much lower price tag. But remember – the property may not be perfect and the process isn’t always easy. It’s best to know what to expect and what to be cautious of upfront before buying a foreclosed home.

The Foreclosure Market

Foreclosure purchases thrived in 2009 – 2010 when a recession-battered housing market hit its peak foreclosure rate. During that time, more than 5 million homes went into foreclosure, and home buyers could often purchase them at more than half off the original price in many areas across the U.S.

Now that the market is in better health and due to the foreclosure moratorium in response to COVID-19, foreclosed homes are at a 16-year low, with only 214,323 properties filing for foreclosure in 2020, according to the ATTOM Data Solutions 2020 Foreclosure Market Report. With less of these homes available at a higher value than before, the foreclosure market may be slowing down. But foreclosed homes are still priced much lower than the average American home for sale, and there is still an opportunity to find that great deal for the person who knows how to navigate the foreclosure market.

The Condition Of The Home

One important consideration is that the condition of a foreclosed home can be a toss-up. Typically, there are some issues with this type of home, and they can range from minor repairs to absolute deal breakers. Think about it: If the home is going through foreclosure because the person couldn’t afford their monthly payments, chances are they didn’t have the extra funds for other housing costs, including general upkeep, replacements and repairs.

The Purchase Method

There are also a few different ways to buy the home, and some methods will fit your goals better than others. How you purchase the home and from whom you purchase it will depend on if you are buying a home in foreclosure or buying an REO property. Because of this, there are specific factors to consider when purchasing from the homeowner (stages 1 – 3), at the auction (stage 4) or from the bank (stage 5).

The Bottom Line: Foreclosed Houses Can Become New Homes

For some buyers, the relatively low price tag of a foreclosed house can make a huge difference for their prospects of homeownership. Before you dive in, just make sure you know what you’re getting yourself into. Research where you can, and think carefully about whether you’re ready to take on some of the potential risks of purchasing foreclosed property.

If you’re ready to get started, you can get mortgage approval online through Rocket Mortgage®.

This Post Has 14 Comments

  1. The concept of foreclosure is very important to safeguard the interest of the creditor and also for the peace and security of the whole society as it serves as security devices to boost the financial transaction.

  2. Wanting to buy a foreclosed home that the bank owns now. At auction. Redemption. Six months. Question is what happens if the owner passes away before the six months of redemption is done.

    1. Hi Cindy:

      I do recommend speaking to a lawyer about the local statutes in your area. If the homeowner has passed, I would think that the winner of the auction is in good position, but local laws are so different across the country.

  3. We got hooked into buying a Wyndham timeshare 4 years ago on our honeymoon. We are in our 70’s and every time we said no they upped all the benefits and added ways to supposedly make it more affordable. As soon as we got home we contacted a Lawyer group who assured us if we paid $12,000, they would have it settled in a year or refund our money. When that didn’t happen. They started telling us they were going to court every time we called and it would only be a few mor weeks. We are still waiting. We talked to them in Nov. of 2020 and they had an offer from Wyndham that basically said we would pay the full amount in 30 days and they would release us. When I asked what that was it was &76,000 dollars. We said no we couldn’t pay that. They were going to take our response to Court in a month. I called today 1-20-21 and was told the letter wasn’t finished but would be by Court on the 28th of January. Loan officials have said it looks like Wyndham is getting ready to foreclose. We have never received a bill or a notice of how or where to go stay so we have the used theservices or received info from Wyndham. Now they want to ruin us financially. We are retired on social security and have a lot of health issues and mobility issues that keep us from traveling, What can we do with this mortgage and get some piece of mind.

    1. Hi Sharon:

      Unfortunately, we don’t do any mortgage business related to timeshares, so I don’t want to give you any advice that’s going to be wrong. I’m sure there are law firms that could give you advice on this. Maybe try to get a second opinion from another law firm to at least make sure all of your options are being scoped out. I’m sorry I can’t be more helpful.

  4. Home close to us being foreclose due man pass way. my family interested in buying. he offer to sale I just didn’t realize he was sick til it was to late. my main worries is someone doing same thing to his place as they did to mine . ( stealing wire , ac and heat out of it and putting holes in wall. ) I try calling the number on the door but no help.

    1. Hi DeVone:

      I don’t know what the situation is here, but I can tell you generally that while the mortgage lender is responsible for securing the property, they don’t necessarily handle the regulations around the sale because the loan is backed by other major mortgage investors like Fannie Mae, Freddie Mac, FHA, etc. most of the time. The best place to look for information is from the local authorities who will know when the property might be going up for auction. Then, if it doesn’t sell at auction, it’ll go back to the mortgage investor and you can make an offer to them. I know that’s not a huge help, but maybe it explains the process.

    1. Hi Omar:

      We can certainly help you look into this. I do want to note that if you live in Mexico, in order to get financing through us, you have to be a U.S. citizen. However, if that’s the case and you are ready to get started, you can give us a call at (888) 855-1822. Thanks, and have a great day!

  5. There is a home coming up for foreclosure auction today. Address is
    . Is there anyway I can find out who this loan was sold to? I want to buy the property but our cash will not be available until later this month. Please let me know ASAP.

    1. Hi Linda:

      If it’s going up for auction, you’ll need to know whether the rules even allow you to buy with a mortgage. If they want the cash now, you could be out of luck. You should be able to figure out who held the loan from public records, but they may have other mortgage investors who are actually in charge of the sale. I wish I could give you more information.

  6. I’m interested in REO @ 2525 Straight Fork Alkol Wva 25501. I was @ both auctions @ the Lincoln County Court House 10/7 and 10/14. The asking price was too high, so it went back to Quicken Loans. The property joins my property. My wife and I would like too meet with someone to work something out. Thank you, Randy

    1. Hi Randy:

      While we backed the mortgage, the loan is then sold to mortgage investors like Fannie Mae, Freddie Mac, FHA, etc. Their policies control what happens next. I’m going to have someone reach out to you and give as much information as we can, but we probably don’t have much control in the actual sale process.

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