A foreclosure occurs when a property owner is unable to make his loan payments. If a homeowner cannot keep up with the payments, they simply have to assign the property to the bank that has the mortgage on the house. A bank can bring a foreclosure action against the owner. They can sell or repossess (take possession of) a property to recoup the amount owed on a delinquent loan secured by the property. An owner’s rights to a property are lost due to non-payment of the mortgage. If the owner is unable to pay off the outstanding debt or sell it by short sale, the property goes to a foreclosure auction. If the property is not sold at auction, it becomes the property of the lender. Foreclosures are pretty straightforward sales because banks usually don’t want to be “homeowners”, they want to be “home lenders.”
Here are the five stages to foreclosure:
• Missed payments:
Foreclosure is a long process, which varies from state to state. A foreclosed property is property that has already been assumed by the bank. This stage begins when the homeowner falls behind on home loan payments (or sometimes other loan terms). This is usually due to difficulties such as unemployment, divorce, death, or medical problems. Lenders can wait a second, third, fourth, or even more late payments before issuing a public notice to the landlord.
• Public notice:
After three to six months of late payments, the lender records a public notice called a ‘Notice of Default’ (NOD) with the County Recorder’s Office, stating that the borrower has defaulted on his mortgage. Notice of Default and Intent to Sell must be mailed to the owner within 30 days of recording. This notice is intended to inform the borrower that he is in danger of losing all rights to the property and may be evicted from the home.
This NOD includes the property information, your name, the amount that is past due, the number of days that it is past due, and a statement that it is past due under the terms of the promissory note and mortgage that you signed when you purchased your home.
The owner has a set period of time to respond to the notice and / or submit pending payments and fees. If money owed or other default is not paid within a specified time, the lender may choose to foreclose on the borrower’s property.
The next step for the lender is to file a notice of sale of the property. However, if the borrower catches up on his payments, the foreclosure process can stop.
• Before foreclosure:
This stage begins when the lender files a notice of default on the property, informing the property owner that the lender will take legal action if the debt is not serviced. After receiving notice from the bank, the homeowner enters a grace period known as “pre-foreclosure.” During this time, the homeowner can either settle with the bank or pay the outstanding amount before foreclosure. Homeowners who are in the pre-foreclosure stage can make a short sale to pay off outstanding debts. If the borrower pays the default during this phase, the foreclosure ends and the borrower avoids eviction and sale of the home. If the default is not canceled, the foreclosure continues.
If the default is not remedied by the prescribed deadline, the lender or their representative sets a date for the sale of the home at a foreclosure auction (sometimes called a trust sale). The sale of the Notice of Trust Sale (NTS) is recorded with the County Recorder’s Office. The notice is sent to the borrower, posted on the property, and printed in the newspaper. At auction, the home is sold to the highest cash bidder, who must pay the highest bid price in cash, usually with a deposit up front and the remainder within 24 hours. The winner of the auction will receive the deed from the property trustee. The executing lender sets an opening offer on the property, which is generally equal to the outstanding loan balance and any other fees. The money from the sale is used to pay foreclosure costs, interest, principles and taxes, etc. Any remaining amount is paid to the owner. In many states, the borrower has the “right of redemption” (they can get the outstanding cash and stop the foreclosure process) until the time the home is auctioned.
• After foreclosure:
If a third party does not buy the property at the foreclosure auction or there are no bids higher than the initial bid, the lender takes possession of the property. The property will be purchased by the attorney making the sale, for the lender. If this occurs and the initial offer is not met, the property is considered bank owned or real estate (REO). This occurs because many of the properties that are up for sale at foreclosure auctions are worth less than the full amount owed to the bank or lender or when no one is bidding on them. The “bank owned” property is put back on the market for sale, usually through a real estate broker.