What is a Foreclosure and How Does it Work?

A foreclosure occurs when a lender reclaims the title of a property once the owner has stopped making mortgage payments. It can be financially devastating for homeowners, but luckily, there are many options for owners who find themselves struggling to make their payments. And for buyers, foreclosed homes may present a great investment opportunity.

Here’s what you need to know about the foreclosure process.

The Steps to Foreclosure

Step 1: Default

After the owner has stopped making payments, typically after three missed payments, the loan becomes delinquent and the owner goes into default. Default continues for 90 days, during which time the lender will get in touch to try and arrange payment options or refinancing. If the borrower cannot pay, the lender will file a Notice of Foreclosure.

Step 2: Notice of Foreclosure

The Notice of Foreclosure typically takes 90 to 120 days to go through the courts. During this time, the buyer may pay off the amount owed to end the foreclosure. If the owner hasn’t paid by the end of this time period, the bank will repossess the home and file a Notice of Sale.

Step 3: Notice of Sale

The Notice of Sale states that the lender will sell the home at auction in 21 days. The owner still has time to pay—up until 5 days before the sale, after which point the home will go to auction.

Step 4: Auction or Trustee Sale

After 21 days, the home is sold at auction to the highest bidder, who is usually required to pay in full up front. At this point, the old owner has three days to move out.

Step 5: Becoming an REO Property

If the home doesn’t sell, it becomes an REO or “real estate owned” property and is listed on the real estate market at a set price. The lender will work with a broker to determine a price for the home and put it on the market. Because the home is sold “as is”, the price is typically lower than market value.

Why are Foreclosures Bad for Owners?

Foreclosures can be devastating to homeowners. They dramatically drop credit stores, and in some states, lenders may be able to hold the borrower financial liable for the difference between what was owed on the mortgage and what the home sold for at auction.

Why Do Investors Buy Foreclosures?

In many cases, foreclosures and REO properties can offer good homes at lower prices. Because the bank is trying to sell the home quickly to recoup its losses, it will often set the selling price lower than market value.

Where Can Foreclosed Homes be Found?

Foreclosures can be found in weekly county newspapers in the 21 days before the auction. For REO properties, you may need to contact lenders directly to get a list of homes. The easiest way to find REO homes is to work with a local agent, who will have access to an inventory of foreclosure auctions and REO properties.

Want to Know More About Foreclosures or Real Estate in Central Ohio?

If you’re thinking of buying or selling a home in Central Ohio, we want to make sure you’ve got the best and most up-to-date information out there. Contact us today to learn more.

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