FORECLOSURE PROCESS

Mortgage Foreclosure Process

When most people purchase real property, they do not have enough money to simply purchase the property outright. In order to make the purchase, they are required to borrow money from a lender. In exchange for lending the money, the lender will hold a lien against the property. If the borrower does not make the required payments, then the loan goes into default and the lender can exercise the lien against the property, in order to take legal possession of the property for the purpose of selling the property to pay off the borrower's loan. This process is called mortgage foreclosure. 

Unfortunately, the mortgage foreclosure process is not standardized across the United States. Each individual state has its own laws that dictate how the process works in that particular state. For this reason, it is very important to pay attention and make sure that you understand the particular laws that apply in your state. Although the laws do vary, there are some common characteristics shared in most states, and these will be discussed in detail.

The first step in the mortgage foreclosure process is that the loan becomes delinquent because the borrower has not made a required payment or payments. When the loan becomes delinquent, the borrower goes into what is called default. Often, the loan will remain in default status for ninety days while the lender contacts the borrower to inform him or her of the situation and give the borrower an opportunity to pay the overdue balance.

Once a mortgage is in default, the lender may then begin the foreclosure process by filing a Notice of Foreclosure. This means that the lender will file documents in court stating an intention to foreclose on the mortgage. There are a number of steps before this process can be completed, and although it varies from state to state, the typical time period that elapses from the filing of foreclosure until sale of the property by the sheriff is about nine months. In some states, the process may be completed in as little as two months, while other states may take as long as twelve months. The borrower can also extend this process even longer by challenging the proceedings in court. This method will not usually prevent the sale of the property, but it can extend the amount of time the borrower can remain in the property.

It is important to be aware that once the lender has filed for foreclosure, the borrower will receive a great deal of mail offering to refinance the property or provide other assistance. The reason the borrower receives this mail is that the Court filing is a public record and anyone can access the information. It is best to be very skeptical about these offers and claims, as many of them are fraudulent. It is best to ignore these offers and work with your lender or another reputable financial institution to resolve the situation.

The length of time from initiation of the foreclosure process to sale of the home will depend on whether your state is a "judicial" or "nonjudicial" state. In a judicial foreclosure state, the lender has to retake the property title through the court system before the property can be sold. Because of this, the borrower has much more time to resolve the situation before the property is sold. In non-judicial foreclosure states, the property can be sold at auction even though the lender has not yet retaken title to the property. It is very important to know which type of law is in place in your state, so that you will know how the foreclosure process works, and how much time you will have to resolve the situation.

After the lender has initiated the foreclosure process, the next step is to provide "notice" to the borrower by "serving" him or her with the necessary documents. Once again, the requirements for this process vary from state to state. There are two primary types of service that are used in foreclosure proceedings. The first is personal service. Very simply, this means that a process server will come to the borrower's residence or place of business and hand deliver the necessary documents. If the borrower cannot be located, or avoids the process server (as commonly occurs), then the lender can often use what is called "service by publication". This means that the lender will place a notice in a local newspaper with certain required information, such as the borrower's name, address, and details of the debt.

In some states, notice can be done through publication, without attempting personal service. This can be problematic for borrowers, because the lender may be able to publish the notice in a newspaper that is not typically read by the general public. For example, the notice may be published in a newspaper that serves the legal community of a given city. More commonly, however, the notice will be placed in a mainstream, well-read local newspaper. Once again, it is important to remember that regulations regarding service vary from state, and therefore, a borrower should be aware of the law in his or her state.

After the borrower has received legal notice, there will be a court date set. Once again, the procedures will differ from state to state, so it would be wise to consult with an attorney or some other individual who is familiar with the applicable law and procedures in the state in which the borrower resides.

At the court hearing, the parties will have the opportunity to present their respective cases and the Court will determine whether it is appropriate for a mortgage foreclosure to be granted. In most cases where the borrower has not paid his or her mortgage, there will not be a valid defense, and foreclosure will be granted. This is not always the case however.

One of the defenses against foreclosure is that the lender lost your payment. Occasionally, a payment may be applied to the wrong account, or if the mortgage was sold, information about the payment may not have been received by the new mortgagor. The borrower may have another defense when he or she has made a payment after the lender filed for foreclosure.

Two of the more common defenses are that the borrower did not receive adequate legal notice of the action, or that the paperwork filed by the lender did not meet the legal requirements. In addition to these, there are other defenses to the action, some of which are very technical. If you are considering challenging a foreclosure action, it is imperative that you speak with an attorney or other experienced individual who can assist you with your case. Once again, it is very important to understand that foreclosure laws vary from state to state, and that what might be a valid defense in one state, may not be in another state.

Once a court grants foreclosure, the property will be sold, either at an auction, or by conventional means. In some states, the borrower will be forced to move right after the auction. If necessary, the Sheriff may evict him or her. In other states, the borrower may have a "redemption period" during which he or she can repurchase the real estate.

First of all, it will depend whether the borrower wants to keep the property. If he or she does not wish to do so, the property owner can sell the property himself or herself before the mortgage forecloses. The advantage to this is that he or she will not have a foreclosure judgment on his or her credit record. This can help make it easier to secure financing in the future. This option will more likely be available for borrowers who have equity in the property. By selling the property on his or her own, the borrower can then pay off the mortgage, and pocket the difference if there is equity remaining.

Another available option is for the borrower to file bankruptcy. There are two primary types of personal bankruptcies available in the United States. A Chapter 13 bankruptcy is used when the individual wishes to "reorganize" his or her debts and continue paying what is owed. Filing a Chapter 13 bankruptcy can allow a borrower to keep his or her real property. This is not the case with a Chapter 7 bankruptcy, which completely discharges any debt the borrower had accumulated under the mortgage. Of course, there are serious repercussions to filing bankruptcy, including severe damage to one's credit rating. If you are considering this option, it is very important that you speak with an experienced professional to determine if this option is best for you.

A final option is to voluntarily deed the property to your lender using what is called a "deed in lieu of foreclosure" or "deed in lieu of forfeiture". This transaction will appear on your credit rating, and may be difficult to negotiate with some lenders, depending on the laws in that state. If you wish to pursue this option, it is usually best to have a lawyer or experienced credit counselors assist you on your behalf.

If the borrower wishes to keep the property, there are a number of options available before the property goes into foreclosure. The first and best option is to deal directly with the situation. Oftentimes individuals faced with a difficult situation such as a potential foreclosure will simply ignore it and hope it will go away. It is much better to be straightforward and explain any problems to the lender as soon as possible. By doing this, the lender may be able to accommodate the situation, and work with the borrower to resolve the situation in a way that is agreeable to both parties. Typically the borrower will deal with the lender's Loss Mitigation Department in cases like this.

There are a number of different options that the lender may offer depending on the situation. To determine these options, it will usually be necessary for the borrower to provided detailed information about his or her economic situation. Again, the exact options available will depend on the laws of the state, as well as the policies of the lender. There are, however, certain commonly available options, including forbearance, refinancing, mortgage modification, deferral of principal, and a temporary indulgence.

A temporary indulgence occurs when the lender agrees to suspend payments for a certain period of time, with the agreement that the suspended payments will be brought up to date when the temporary indulgence period is over. Typically, the borrower will need to demonstrate that there is a temporary problem making it difficult to pay the mortgage, and that this problem will be resolved in the near future. Two examples of this would be if the borrower had sold another property and was waiting to receive the proceeds from the sale, or if the borrower was waiting to receive an insurance settlement.

Another option is forbearance, where the lender agrees to allow the borrower to make reduced payments or no payments for a certain period of time. Such an agreement can be difficult to negotiate unless the borrower has an excellent track record with the lender. If the borrower does not abide by the terms of the forbearance, a foreclosure proceeding will likely be initiated. A similar option is deferral of principal. This means that the borrower agrees to pay the interest only for a certain period of time, and then making the normal monthly payments.

Mortgage modification and refinancing are two other options available to a lender who finds himself or herself in a financial bind. Mortgage modification means that the borrower renegotiates the terms of the mortgage with the current lender. This can include changing the interest rate, adding any arrearage to the principal, and extending the length of the mortgage. Refinancing means that the borrower obtains a new mortgage with a different lender. It is usually best to avoid this option, because most of the alternatives available to a borrower in distress will only make the situation worse.

If the property has already gone into foreclosure, there are still options available. It may still be possible to work out an agreement with the lender, such as those described above. If this is not possible, the borrower may consider filing a Chapter 13 Reorganization bankruptcy. As described above, this will allow the borrower to work out a payment plan with the lender and keep the property.

In some states, the borrower may also have the option of reinstatement. This means that the borrower brings the foreclosed mortgage current, including all overdue amounts, as well as fees and costs. In states where redemption is available, the borrower is usually limited in how often he or she can take advantage of this option. Again, redemption is only available in some states, and the law varies among those states that offer redemption. It is important to consult an experience professional if you are unsure about this option.

A final option for a borrower in foreclosure who wishes to keep the property is for him or her to redeem the mortgage. This means that the borrower pays off the entire principal balance of the mortgage, along with the accumulated interest, fees and costs. Obviously, it will be very difficult for many borrowers to take advantage of this option.

It is important to be aware that buying property in foreclosure is a risky venture. Most foreclosed properties are sold "as is" and there can be problems not only with the structure, but there may also be liens on the property, unpaid taxes, and other problems to deal with. If you are not experienced in real estate, you should be very cautious before getting involved with purchasing foreclosed properties. That being said, buying foreclosure properties can be very rewarding and profitable if you are careful and thorough.

The first step will be to familiarize yourself with the applicable laws and the process in your area. Once you understand this, you will next want to start identifying geographical areas in which you would like to purchase a property. Once you determine the areas you are interested in, you will want to begin locating properties that are in the foreclosure process. There are a number of different ways to do this, including checking the classified ads in your local newspaper. Foreclosure properties may be listed several different ways, such as under "Foreclosure Sales", or "Sheriff's Sales". You can also learn about properties if the lender is giving notice to the borrower of the lender's intention to initiate foreclosure proceedings.

Other ways of learning about foreclosure properties include commercial databases, the number of which has greatly expanded in recent years. If you are using a commercial database of foreclosure properties, it is best to make sure that there are many pre-foreclosure properties listed, as these will typically be the best bargains. Interested parties may also check with the County Recorder's Office, and it may be possible to get information from the applicable court in some areas. Another way to obtain information is through the banks or other lending institutions that hold the mortgages, or through government agencies such as the Federal Housing Administration, the Department of Housing and Urban Development (HUD), or the Veterans Administration.

After you learn about the properties in foreclosure in your area, the next step is to inspect the properties you are interested in, if possible. Sometimes you will not be able to inspect the property ahead of time. You will then want to determine the value of comparable properties in the same area. This information can be obtained from local real estate agents. If you are still interested in the property at this point, the next step will be to find out who owns the property, and what liens encumber the property. Find out the balance in default to the lender, and the balance remaining on the loan that has resulted in the foreclosure proceeding.

You will want to find out if back taxes are owed on the real estate. To determine this information you will want to conduct a full title search. Finally, you should make sure you are familiar with any land zoning, easement or toxic waste issues that could impact your use of the property. Also make sure there are no pest problems, other structural problems, and determine if any illegal alterations have been made to the property without the necessary permits. Once you know exactly what you are facing, how you will proceed will depend on what type of sale is taking place.

There are three different types of foreclosure sales: pre-foreclosure sales, foreclosure auctions, and real estate owned sales. A pre-foreclosure sale takes place when the property owner sells the property privately after the foreclosure process has begun, but before the property has actually gone into foreclosure. This is where most beginners will have the best experience getting involved with foreclosure sales. Typically, the owner will be willing to sell the property below its appraised value, because he or she is under duress and wants to pay off the mortgage, avoid the foreclosure process, and prevent damage to his or her credit rating. Experts suggest that buyers not pay more than 70% of the appraised property value in a pre-foreclosure sale, although in the current tight real estate market, one may have to pay more than this amount.

One advantage of pre-foreclosure sales is that the prospective buyer will have the opportunity to inspect the property prior to the purchase. The difficult part of these sales will be the negotiation with the seller and the fact that there will often be time pressures to complete the transaction before the foreclosure sale takes place. You may want to have an attorney or other experienced professional help you negotiate the sales contract. The best way to improve your negotiating position is to have pre-approved financing in place when you enter into negotiations. Another possible advantage to having pre-approved financing in place is that this may allow the buyer to simply take over the seller's existing mortgage and pay whatever is necessary to bring the loan up to date.

Finally, it is important to establish a good relationship with the seller. This can be difficult, because often the seller is very disturbed because of the process and the time constraints. This may make the seller difficult to deal with. Being patient and understanding the situation can help smooth this process. Also, making the seller feel that he or she is also getting a good deal can be helpful.

The key to success in these types of transactions is to know exactly what deal you are entering into and what you can expect to have to spend. If you are getting a below-market deal and you believe that the additional hassles of this type of transaction do not outweigh the cost savings, then this is likely a good deal.

Foreclosure auctions are the next type of foreclosure sales. These are the riskiest type of foreclosure sales for novices to get involved with, as many of the participants at the auctions are savvy professional investors who make their living through purchasing property at auctions. Attempting to compete with these individuals can be very difficult for someone who is not properly prepared. Often the lender will also participate in the auction as well, in order to prevent the property from selling for a low price that would cause the lender to lose money. Approximately eighty percent of auctions end with the lender retaining the property.

Another problem is that you may not be able to inspect the property before the auction, and you will typically be required to pay the full auction price within a short period of time. You may also have to evict any tenants that remain in the property after the auction. This can be a messy process. You will also be required to pay for the property with a certified check or cash.

If you do wish to get involved with foreclosure auctions, you should be well-prepared in advance. It would be a good idea to make certain that you fully understand how the process works, and you should also sit in on one or more similar auctions beforehand to help you become comfortable with the process. At the time of the auction, you should make sure that you have any necessary financing in place, and then determine your maximum bid, and do not go over that amount. It is probably best for inexperienced individuals to avoid these types of sales, unless one is very well prepared by taking the steps explained above. It is also important to know that about half of all properties at foreclosure auctions are never actually sold at the auction, as the original owner works out some way to keep the property. This can be very frustrating if one has spent a great deal of time and effort preparing to buy a certain property.

The final type of foreclosure sales are real estate owned sales. These are the easiest and least risky types of transactions, but they also offer the least potential reward. These are properties that have already completed the foreclosure process and are now owned by the bank or other lending institution. These properties will usually be sold free and clear of any encumbrances, as the bank will pay these to sell the property with a clear title. These properties will sometimes have necessary repairs made before they are sold, although this is not always the case. Because these properties are usually sold "as is", it is important to know if there are any repairs necessary.

In essence, this type of transaction is very similar to the typical real estate transaction one would expect for any real estate that is not in the foreclosure process. The advantage of this is that the buyer has more time to secure financing and inspect the property. The disadvantage is that this type of transaction does not offer a significant savings as compared to a traditional real estate transaction.

Another option available is to purchase a HUD (Federal Housing and Urban Development) home, which will be available after the foreclosure of the HUD or FHA (Federal Housing Authority) mortgage. This is similar to purchasing a home at a real estate owned sale. The advantage is that HUD will pay a small amount of the closing costs, and if the property has been pre-approved for an FHA mortgage, it will already have been appraised, which will help expedite the sales process.

In conclusion, buying a foreclosure property can be an excellent way to save money on the purchase of a home or property, but it is not without risks. The key to success is to be very well prepared and be sure that you completely understand the process and applicable laws in your area. For most first-time foreclosure buyers, buying a pre-foreclosure property will offer the best opportunities of saving a significant amount of money without undue risk. Purchasing property at a foreclosure auction is far more risky, and is best left to professionals who are well-acquainted with how the process works. Buying a real estate owned property is very similar to purchasing property through a conventional real estate sale, and usually offers little savings over a conventional sale.

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