Home foreclosure is the legal process that allows a lender to take possession of a property if the borrower fails to pay their mortgage. The home foreclosure process includes multiple stages, beginning when the home loan becomes delinquent and ending after the sale of the property.
Learn more about how home foreclosure works and what you need to know if you’re interested in buying a house in foreclosure.
What is a home foreclosure?
If a homeowner doesn’t pay their mortgage, their lender can use the home foreclosure process to repossess the property. When a borrower takes out a mortgage, the home they are purchasing becomes collateral for the loan. This gives the lender the legal right to foreclose on the house in the event of nonpayment. In turn, the lender can sell the property to recoup their financial loss.
To initiate a home foreclosure, the bank or mortgage company must follow specific steps, which vary depending on state laws, mortgage program, and type of foreclosure.
In a “judicial foreclosure,” the lender files a lawsuit against the borrower and must win in court to foreclose on the home. In a “non-judicial foreclosure,” the lender doesn’t need to take the borrower to court and instead follows a series of steps.
What does ‘foreclosed’ mean?
While the home foreclosure process includes everything that happens leading up to the sale of the home, the property is foreclosed when it’s sold to a third party or becomes property of the lender.
How do foreclosures work?
Home foreclosures proceed differently depending on the type of foreclosure process, state law, and other factors. Here’s a general overview of home foreclosure proceedings.
Default is when a borrower does not pay their mortgage as agreed. A defaulted loan is what triggers the home foreclosure process.
Mortgage lenders typically do not begin foreclosure after a single missed payment. Usually, after 90 days or three consecutive missed payments, lenders will initiate home foreclosure by sending the borrower a “Demand Letter” or “Notice to Accelerate,” giving the borrower 30 days to bring the loan current. However, this is a common practice and not an official timeline. Legally, some lenders may be able to foreclose sooner.
During the default stage, borrowers can bring the loan current by paying the missed payments. Additionally, some borrowers may qualify for other loan options if they’re facing financial hardship. Known as loss mitigation, these options include forbearance, loan modification, and other remedies. Loss mitigation solutions vary based on the lender, loan type, and state. Borrowers can also refinance the mortgage, sell the property, or voluntarily give up the home (known as “deed in lieu of foreclosure”) to avoid home foreclosure.
Notice of home foreclosure and foreclosure filing
If a loan remains in default, typically after 120 days or four missed payments, the lender will take the next step in the foreclosure process. In a judicial home foreclosure, the lender or servicer files a “complaint” in court and simultaneously gives the borrower notice of the foreclosure proceedings.
The borrower can defend themselves against the foreclosure in court. In a non-judicial foreclosure, the lender provides the borrower a “notice of intent to foreclose” and the scheduled sale date of the property.
Once a borrower receives a foreclosure notice, they can still communicate with the lender to avoid further steps in the foreclosure process. In addition to bringing the loan current and loss mitigation options, borrowers may consider filing for bankruptcy which temporarily halts the home foreclosure, or pursuing a short sale with the lender’s approval.
A short sale occurs when a homeowner in financial distress sells their home for less than what they owe on their mortgage.
Scheduling of foreclosure sale
If the court awards “judgment” to the lender in a judicial foreclosure, they can proceed with selling the property. The county sheriff or other local government branch schedules the sale, and the lender notifies the borrower of the sale date.
In both judicial and non-judicial home foreclosures, the lender must publicly advertise the foreclosure sale in the newspaper or other media for a specified time. Borrowers can appeal a court’s foreclosure judgment or make arrangements with the lender to satisfy the loan and attorney fees, if applicable, to stop the foreclosure.
The county sheriff, or another authorized party, conducts the sale by auction on the scheduled date. State laws determine the specifics of the sale, including the minimum bid, appraisal, requirements, deposits, and more.
There are two possible outcomes to auction sales. Either a third party places a winning bid on the property and becomes the new owner, or the house becomes the bank’s property. Homes that revert to the bank after foreclosure are called real estate-owned (REO) properties.
Right of redemption
Some states have a right of redemption in their home foreclosure process. This refers to the window of time a borrower can bring the loan current and regain ownership of the home after the foreclosure sale. For states with this right, the time frame can range from 10 days to two years. After this period, the homeowner has no other options to reclaim ownership of the property.
Vacate or eviction
Homeowners have the right to continue living in a house in foreclosure up until the home is sold. After the sale, they must surrender the property and vacate the premises. If necessary, the new owner can initiate the formal eviction process according to their state’s laws.
How to buy a foreclosed home
Purchasing homes in foreclosure has gained in popularity over the past decade. What once used to be a complicated process has become more accessible and may provide multiple benefits to buyers.
Foreclosed homes typically sell for less than market value because they are sold in as-is condition, and lenders try to get rid of them quickly. Other benefits include having fewer requirements during the transaction and additional incentives from lenders or government agencies selling REO properties.
3 ways of buying a foreclosed home
Foreclosure home sales occur in three ways: preforeclosure, at auction, and REO property sales.
- Preforeclosure: Buyers can purchase a home in preforeclosure — when the homeowner still has possession of the house and can sell it to satisfy the loan. Short sales — transactions where a lender allows a buyer to sell a home for less than what they owe on the mortgage — also occur during the preforeclosure stage.
- At auction: Buyers can purchase homes in foreclosure at public auction.
- REO property: Homes that do not sell at auction become property of the bank or lender. In that case, borrowers can buy directly from lenders, banks, or government agencies.
Steps to buying a house in foreclosure
The process of buying a foreclosed home differs from a traditional purchase. Instead of working with a seller and a seller’s agent, you’ll be negotiating with a bank or purchasing the house at auction. In either case, you’ll likely have limited details about the property.
Here are some steps to buying a foreclosed home.
- Determine your budget. As with any home purchase, you’ll need to know upfront how much you’re looking to spend. Remember that foreclosures are typically sold as-is, so you may need to add additional room in your budget for renovations and major repairs.
- Shop around for a mortgage and get preapproved. While real estate investors and other buyers often purchase foreclosed homes with cash, borrowers have multiple options for financing a foreclosed home. There is no specific foreclosure mortgage. However, buyers can purchase a foreclosed property with a conventional mortgage or government loans such as an FHA, VA, or USDA loan, provided the property meets the specific program requirements. Borrowers who also need to finance repairs might consider a renovation loan such as the FHA 203(k) loan, which covers the purchase price and cost of repairs/renovation in one mortgage. After comparing loan options and terms among multiple lenders, get preapproved for a mortgage so you can begin looking at foreclosure home sales.
- Work with a real estate professional. While not required, working with a real estate agent who specializes in foreclosure home sales will put you at an advantage over looking for homes in foreclosure on your own.
- Make an offer. Once you find a property, you’ll place a bid if purchasing via auction or make an offer if buying a foreclosed home from a bank.
- Close on the home. You’ll take the final steps to finalize the purchase. This will vary depending on how you’re purchasing and financing the property. Steps include getting a home inspection, negotiating further with the bank or lender, completing repairs, getting a title check, going through the loan underwriting process, and signing final paperwork.
Finding home foreclosures near me
In addition to working with a real estate agent, buyers have access to multiple resources for finding foreclosure home sales.
- Multiple Listing Service (MLS). Homes in foreclosure and preforeclosure are listed on the MLS. These properties are sometimes, but not always, listed as foreclosed homes or bank-owned. However, terminology in the listing may identify them as such. For example, the description may state “sold as-is” or “subject to bank approval” in the case of a short sale.
- Newspapers. Public auctions for foreclosure home sales are advertised in newspapers and other public media, such as local government websites.
- Lender websites. Some banks and lenders who sell REO properties may provide listings on their websites.
- Foreclosure home sales programs. Both Fannie Mae and Freddie Mac, government-sponsored companies that guarantee most mortgages, have specific programs for selling home foreclosures — HomePath and HomeSteps, respectively.
- Government-owned listings. Foreclosed homes owned by government agencies, including VA, USDA, and HUD, are available on their respective websites. Other federal agencies that offer foreclosure home sales maintain listings as well.
- Online search. Many websites aggregate foreclosure home sales from multiple sources, including those listed above, into a single database. Often a search of “foreclosed homes near me” or “houses for sale foreclosures” will reveal such databases.
Is buying a foreclosed home a good idea?
While buying a foreclosed home may help buyers find a home at a reasonable price tag, it comes with many risks and downsides. There are various unknowns with a house in foreclosure, so what appears to be a good deal initially might be more complex than you think.
Buyers — especially those buying a foreclosed home as a primary residence — should proceed with caution. Here are some things to keep in mind when looking at homes in foreclosure.
- Unknown condition of the home. Foreclosed homes are usually sold as-is, so a buyer can potentially be buying a foreclosed home with significant issues. The original owners have the right to live in the house up until the home sale, so there may not be a way to verify the condition of the home’s interior before the sale. And in some cases, homeowners intentionally damage the property before leaving it. As a result, new buyers may end up with extensive and costly repairs to deal with later.
- Additional expenses. Homes in foreclosure may have other liabilities besides the past-due mortgage. The property may have tax liens or outstanding permits or violations, which means the purchaser must resolve those issues after the purchase.
- Right of redemption period. Some states give homeowners a right of redemption during the home foreclosure process. This means a buyer who purchases a property could lose it if the homeowner satisfies their loan and regains possession of the home.
- Complicated process. Buying a house in foreclosure means working with a bank rather than a seller. Communication may be limited, and the process could take several months or longer. Banks or lenders may be less likely to negotiate the purchase agreement.
- Competition from other buyers. Home foreclosures appeal to various buyers, including new homeowners with limited budgets and real estate investors looking to purchase properties at a bargain. This means a lot of competition when bidding or making offers, often with all-cash buyers. Some programs like Fannie Mae’s HomePath give non-investor buyers time to view new listings without competition from investors.
Whether you’re shopping for a traditional listing or a foreclosure, contact a local Finance of America Mortgage Advisor today to explore your mortgage options.