Understanding Foreclosures

Doubtless you have heard that the aftermath of the subprime mortgage meltdown and the resulting recession have brought about a huge increase in the number of foreclosures on the market. Many people have an idea that buying a foreclosed home is a good idea, but are not entirely sure why.

In fact, most people don't have a solid grasp of what a foreclosure really is. They can get in the ballpark with a definition, but are still slightly off base.

Let's start with the basics. We all know that most people take out a mortgage from a lender in order to buy a house today. In order to get that money, they have to sign an accord in which they agree to adhere to certain conditions, including regular payments on principle and interest. When they don't make these payments, they are said to be defaulting, and the lender begins to take action.

That action starts with a notice to the home owners that they are in default, and that the lender is about to foreclose. Once that notification is given, the distress of the property is made public. Generally, the property owner has 30 days to either pay the mortgage, catch up on their payments, or sell the property. This is known as the pre-foreclosure state. It presents a good opportunity for both the seller and a potential buyer, which we talk about in another article.

If the terms of the mortgage are not made, or an alternative agreement come to with the lender (see our article on short sales), the lender will foreclose on the mortgage. At this point, the lender will put the property up at an auction, in an effort to recoup most of the cost of the loan itself.

The strange thing about foreclosure auctions is that most of the time, a foreclosed house will not sell at one. It's a lot of work to purchase a foreclosed property at an auction, another topic we look at in an article on our site.

If and when the auction is over and the property has not sold, the lender is said to be the owner of the property. At this point, although the property has been foreclosed upon, it is no longer said to be in foreclosure, but is considered REO (and yes, we have an article on that as well!).