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The Basics of Foreclosure

 


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Foreclosure is an unhappy event for all concerned. The basics of foreclosure vary from state to state, but the end result is usually the same. Everyone loses with the exception of potential Real Estate investors.

When a loan is made for the purpose of purchasing property the loan is secured by a legal instrument called a mortgage or a deed of trust. The mortgage is a lien on the property and requires that the property owner satisfy the conditions of the contract or risk losing the property. When the borrowing home owner fails to meet his monthly payment obligations, a process called acceleration takes place. This means the entire balance of the loan is due and not just the overdue monthly payments.

In order for this acceleration process to take place, an acceleration clause must be written into the mortgage contract, but in most mortgages this is surely going to be the case. The terms of the mortgage will also specify how far behind the payments must be in order to activate the acceleration. When acceleration takes place and the entire loan balance is due, a process begins call foreclosure. There are several types of foreclosures and they vary from State to State, but the most common are Judicial foreclosures and foreclosure by power of sale.

Judicial Foreclosure is the most common and is allowed in every State. In this process, the foreclosure proceeding are handled by a court. When everyone has been notified and the court has examined the matter and determined the validity of the acceleration and default, the property is sold at public auction. The auction is conducted by the court. The proceeds of the sale are paid first to satisfy the mortgage holder and then any other lien holders are paid. If there are any funds left after this, they are paid to the property holder. This rarely happens, however, because it there is enough equity in the property to allow the owner to realize some return after the judicial sale, they will usually be able to use this equity to avoid default.

The power of sale foreclosure works in the same fashion except the court is not involved. The mortgage holder has more options in this type of foreclosure, but the end result is the same. There are an increasing number of foreclosures taking place in the United States, but at the same time there are more options opening up to avoid them. It is only when the property holders are totally without any financial recourse does the foreclosure process actually go through to the end. Lenders do not seek foreclosures either and this is why the loan approval process is so detailed and exacting. Foreclosures are expensive and time consuming and generally result in loss to the lender.

This situation has led to opportunities for Real Estate investors. Many specialize in finding foreclosure properties and purchasing them at auction. Another way of taking advantage of foreclosures is the Short Sale. In this type of deal, the investors buy the property at a reduced sale price, thus avoiding the foreclosure. The lenders are able to get out of the deal and cut their losses quickly in a Short Sale, and the investor is left holding property that they have purchased considerably below market price.

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