What is Foreclosure?

What is a Foreclosure?

Houses are expensive.  Even a modest home will almost certainly be priced above $100,000.  Consequently, most homebuyers do not have sufficient funds available to pay off the cost of their new property at the time of signing.  In this common scenario, the only viable option is for the homebuyer to acquire a Mortgage.  A Mortgage is, essentially, a loan which allows the buyer to assume possession of the property with the agreement that he will repay the amount of the loan over the course of a set number of years.  The lender retains the Lien for the property, which signifies the right of property, whereas the homebuyer will gain right of possession.  Once the loan has been repaid in full, the Mortgage is terminated and the home is fully and completely the property of the homebuyer.

However, many times the Mortgager—that is, the borrower, the homebuyer—fails to repay his loan.  This is known as defaulting.  Mortgagers default for many reasons, but it is almost never a refusal to pay.  Rather, Mortgagers usually default because they are unable to produce the necessary funds.  When this unfortunate situation arises, and it becomes evident that the Mortgager is both incapable of repaying his loan and will remain unable to pay for the foreseeable future, then the Mortgagee—the lender—will begin the process of Foreclosure.

A Foreclosure is the legal process through which the lender terminates the Mortgage and reclaims possession of the property.  When the lender decides to take this action, the homeowner will typically have a period of time during which he can retain possession of the property by producing the delinquent payments owed.  Once this period has expired, the Foreclosure will proceed in one of several ways.  The two most common forms of Foreclosure in the United States are Judicial Foreclosure and Nonjudicial Foreclosure.  There are several other types of Foreclosure, such as a Strict Foreclosure, but these are rare, applying only in very specific situations.

A Judicial Foreclosure, as the name suggests, begins with the lender filing a formal grievance in court against the Mortgager.  The homeowner will be notified and will then have the opportunity to defend himself in court.  If the court finds that the claims made by the lender are valid, they will approve Foreclosure proceedings and authorize a Sheriff’s Sale.  A Sherriff’s Sale is a public auction of the Foreclosed property.  It is a means for the lender to recover the amount owed on the Mortgage.  In many states, there are laws in place which dictate that, in the event of a successful Sherriff’s Sale, the proceeds from the sale are first used to reimburse the lender for the Mortgage, and then are distributed to any additional Lien Holders.  Then the remaining proceeds, if there are any, are delivered to the Mortgagor.  The reason for these laws is to protect the homeowner’s equity if the debt owed is significantly less than the value of the property—if, for example, the homeowner had paid off the majority of the Mortgage prior to undergoing financial hardships and defaulting.

Once the Sheriff’s Sale is completed, one of two things will happen.  If a sufficient bid was placed, the winner will be required to present 10 % of the winning bid in cash immediately, and the rest via a Mortgage or private money thereafter.  The court will then confirm the sale, the deed will be recorded, and the winner will then become the new owner of the property.  If, however, no sufficient bids are made (the lender determines a minimum bid required prior to the beginning of the auction), then the home will become the property of the lender, known as a Real Estate Owned (REO) property.

A Nonjudicial Foreclosure is very similar to a Judicial Foreclosure, with the major exception that the entire process is done without the participation of the courts.  This allows the proceedings to continue much faster, and without expensive court costs.  In most, but not all, states, a Nonjudicial Foreclosure is only permitted if a power of sale clause was included in the Mortgage agreement—which is very common.  Whereas in a Judicial Foreclosure the lender must file a lawsuit in court against the Mortgager, in a Nonjudicial Foreclosure the lender will send the homeowner a Notice of Default if Mortgage payments are delinquent.  If these payments remain delinquent after a certain period of time, the Lender will then issue a Notice of Sale to the homeowner, as well declaring their intention to sell with the country recorder.  The lender will notify the general public of the upcoming auction, which will occur much like a Sherriff’s Sale, except that there will be no Sheriff overseeing the proceedings.  The only other notable difference is that the lender itself is free to bid in the auction.  Upon the auction’s conclusion, the same process is repeated as in a Judicial Foreclosure, and the home becomes the property of the highest bidder.

I hope that this overview has been helpful.  But keep in mind that it is only an overview.  If you are truly interested in learning about Foreclosures and related investment opportunities, I strongly recommend that you consider my Short Sales Magic Home-Study Course.  This is a comprehensive program which you can consult in your own time, designed to teach you everything you need to know about Short Sales.  And if you would like an even more in-depth, personalized instruction, my Short Sales Boot Camp is currently accepting reservations.  Whether you’re an experienced Real Estate expert or a beginning Investor, both my Home-Study Course and Boot Camp are great options for anyone interested in Short Sales.  For more information, please visit www.shortsalesmagic.com

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