A foreclosure occurs when a property owner cannot make payments on their loan. If a homeowner unable to keep up with payments he simply had to relinquish the property back to the bank that holds the mortgage on the house. A bank can bring a foreclosure action against the homeowner. They can sell or repossess (take ownership of) a property in order to recover the amount owed on a defaulted loan secured by the property. A homeowner’s rights to a property are forfeited because of failure to pay the mortgage. If the owner cannot pay off the outstanding debt or sell it via short sale, the property then goes to a foreclosure auction. If the property does not sell at auction, it becomes the property of the lending institution. Foreclosures are fairly straight-forward sales because the banks typically do not want to be “home owners”, they want to be “home loaners”.
Here are the five stages for foreclosure:
• Missed Payments:
Foreclosure is a long process, which varies from state to state. A foreclosed property is a property that has already been taken over by the bank. This stage begins when the homeowner falls behind on home-loan payments (or sometimes other terms of the loan). This is usually due to hardships such as unemployment, divorce, death or medical challenges. Lenders may wait for a second, third, fourth or even more missed payments before sending the homeowner a public notice.
• Public Notice:
After three to six months of missed payments, the lender records a public notice called ‘Notice of default’ (NOD) with the County Recorder’s Office, indicating the borrower has defaulted on his mortgage. Notice of default and intention to sell must be mailed to the homeowner within 30 days of the recording. This notice is intended to make the borrower aware 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 you’re delinquent, the number of days that you’re behind, and a statement indicating that you’re in default under the terms of the note and the mortgage you signed when you purchased your home.
The homeowner has a given period of time to respond to the notice and/or come up with the outstanding payments and fees. If the money owed or other breach is not paid in a given time, the lender may choose to foreclose the borrower’s property.
The next step is for the lender is to file a notice of sale for the property. However, if the borrower catches up on his or her payments, the foreclosure process can be halted.
This stage begins when lender files a default notice on the property, which informs the property owner that the lender will pursue legal action if the debt is not taken care of. After receiving notice from the bank, the homeowner enters a grace period known as “pre-foreclosure”. During this time the homeowner can work out a deal with the bank or pay the outstanding amount owed before it is foreclosed. Property owners who are in the pre-foreclosure stage may enter into a short sale in order to pay off outstanding debts. If the borrower pays off the default during this phase, foreclosure ends and the borrower avoids home eviction and sale. If the default is not paid off, foreclosure continues.
If the default is not remedied by the prescribed deadline the lender or its representative sets a date for the home to be sold at a foreclosure auction (sometimes referred to as a Trustee Sale). The Notice of Trustee Sale (NTS) sale is recorded with the County Recorder’s Office. Notification is sent to the borrower, posted on the property and printed in the newspaper. At the auction, the home is sold to the highest bidder for cash who must pay the high bid price in cash, typically with a deposit up front and the remainder within 24 hours. The winner of the auction will then receive the trustee’s deed to the property. An opening bid on the property is set by the foreclosing lender which is usually equal to the outstanding loan balance and any other charges. Money from the sale is used to pay off the costs of the foreclosure, interest, principle and taxes etc. Any amount left over is paid to the homeowner. In many states, the borrower has the “right of redemption” (he can come up with the outstanding cash and stop the foreclosure process) up to the moment the home will be auctioned off.
If a third party does not purchase the property at the foreclosure auction or there are no bids higher than the opening bid, the lender takes ownership of it. The property will be purchased by the attorney conducting the sale, for the lender. If this occurs and the opening bid is not met, the property is deemed as a Bank-Owned Property or Real Estate Owned (REO). This occurs because many of the properties up for sale at foreclosure auctions are worth less than the total amount owed to the bank or lender or when no one bid on it. The “bank owned” property is then put back on the market for sale, usually listed through a real estate broker.