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Foreclosure Information

Buyers

Could the purchase of a foreclosed property be your best path to home ownership? What are some potential pitfalls? Let's get you started by taking a look at a few things before you decide whether purchasing a foreclosure makes sense for you.

There are two common misconceptions about foreclosure sales, however. The first is that banks do not profit off from foreclosure sales. Many times, the bank does make a profit. The second misconception is that all foreclosure sales are good deals. Many are, but some homes may have a lot of debt against them that has to be accounted for at the sale.

There are different types of foreclosure sales, and the type of sale used varies from state to state. In some states, the bank will repossess the property and sell it as "real estate owned" (REO). This is sometimes known as a "strict foreclosure." Another type of sale is a judicial foreclosure. This type of foreclosure is handled by the courts or the county clerk's office. The property is placed up for auction and is bid on by banks and lenders. The final type of foreclosure sale is a public auction, known as a statutory or nonjudicial foreclosure. This is the type of auction that anyone can bid on and is a favorite of real estate investors.

Real estate investors and new homebuyers can benefit from foreclosure sales by getting more property for their money. For example, at a foreclosure auction, an investor can determine how much he can afford to bid for the property and still make a profit on the resell. If no one bids higher than that figure, the investor can purchase the property, fix cosmetic flaws and sell it for a profit. Foreclosure sales can also help people buy a home for the first time.

Foreclosures are not always a good deal. Many homeowners who are facing foreclosure will do physical damage to the property out of anger. Some counties that do foreclosure auctions do not open the home prior to auction, so you may not know what it looks like inside. Homeowners who are facing foreclosure may not care about the home they are about to lose, so even if they do not damage the home, they may not keep it up or fix any problems that occur before they are evicted. By buying a foreclosure, you could be buying a home that needs a lot of work. So, do your homework and lots of research and try to evaluate the condition of the property.

Buying foreclosures requires some expertise and fortitude. There is risk involved, as you could end up buying a money pit instead of a profitable investment. Before you decide to purchase a foreclosure, make sure you are comfortable with the fact that you will be benefiting from someone else's misfortune. While there is little you can do to help the distressed homeowner, many buyers feel remorse for taking advantage of someone who is in a difficult situation, so make sure you are comfortable with the process before you proceed.

You'll need to have your financing plan in place before you make an offer. Financing options for a foreclosed property may vary widely; from below-market rates from the owner of a bank-owned home, to the need to pay in full on the day of sale for a property sold at a public auction. You should also consider whether all the time and effort that you'll need to spend to become a successful buyer of a foreclosed home will be worth it. For more information about buying a foreclosed property, contact one of our knowledgable sales associates today!

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Sellers

People may face foreclosure for many reasons. Extreme changes in life situations — job loss, death, divorce, prolonged illness and many others — or because they must immediately relocate. Foreclosure can occur when payments become three to four or more months late, depending on the mortgage terms.

In most cases even if the bank is able to sell the property, the borrower may have to pay for any difference between the remaining balance on the loan and the sales price of the property at foreclosure, depending on the mortgage terms and state law. Foreclosure stays on a credit report for seven to 10 years.

It's important to note that no one benefits from a foreclosure and mortgage servicers are doing everything they can to help borrowers who want to stay in their homes and have the means to pay their mortgage. Here’s the good news: Lenders and servicers don't like to foreclose on mortgages. Foreclosures cost more than can be made back, so lenders foreclose only as a way of limiting losses on a defaulted loan. If homeowners get behind on payments, lenders likely will try to work with them to bring the loan current. In order to do so, however, the owner must stay in communication with the lender and be honest about their financial situation.

The lender’s willingness to help with current problems will depend heavily on past payment records. If the owner has made consistently timely payments and had no serious defaults, the lender will be more receptive than if the borrower has a record of unexplained chronic late payments.

For those falling behind in payments or who know they are likely to do so in the immediate future, they should contact the lender right away about meeting to discuss alternative payment arrangements. Remember, lenders do not want to foreclose.

Lenders often can help

An agreement between borrower and lender to prevent the loss of a home is called a loan modification or workout plan. It will have specific deadlines that must be met to avoid foreclosure, so it must be based on what the borrower really can do to get the loan up to date again.

The nature of the plan will depend on the seriousness of the default, prospects for obtaining funds to cure the default, whether the financial problems are short term or long term and the current value of the property.

If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting “temporary indulgence.” An example of where this would be considered is a house that has been sold but the sale has not settled; another is a pending insurance settlement. The lender will want documented evidence, such as the sales contract, before granting indulgence.

Those who suffered a temporary loss of income but can demonstrate that the income has returned to its previous level may be able to structure a “repayment plan.” This plan requires normal mortgage payments to be made as scheduled along with an additional amount that will end the delinquency in no more than 12 to 24 months. In some cases, the additional amount may be a lump sum due at a specific date in the future. Repayment plans are probably the most frequently used type of agreement.

In some cases, it may be impossible to make any payments at all for some time. For those who have a good record with the lender, a “forbearance plan” will allow them to suspend payments or make reduced payments for a specified length of time. In most cases the length of the plan will not exceed 18 months and will stipulate commencement of foreclosure action if the borrower defaults on the agreement.

These plans represent last-ditch efforts by borrower and lender to keep the borrower in the home. They are not a substitute for good financial planning and likely will not be available if the borrower's payment record is poor. Lenders or servicers may work closely with good borrowers who are having a period of real emergency and hardship, but they are not inclined to cooperate with those who demonstrate little financial discipline.

Clearly, having a good payment record is important as is meeting with the lender at the first sign of trouble and being honest about any impending difficulties. There’s no shame in having problems; hiding them just makes overcoming them harder. Remember, the loan modification process is complicated and time consuming. Don't expect delinquencies that took months to develop to be corrected in one phone call.

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To learn more about foreclosures give us a call or see the links below for a list of currently available foreclosed properties offered through Fannie Mae and if you see any of interest, we can help!

Fannie Mae