If you are looking for a bargain house to buy, a home in foreclosure is one good option. A foreclosure allows the lender to recover part, if not the entire amount, of what is owed on a defaulted mortgage loan. The process involves the mortgage lender taking ownership of the property and selling it.
Purchasing a house in foreclosure comes with its own challenges, though, and the first thing you need to do to overcome these hurdles is to understand the different stages of foreclosure.
Preforeclosure. A property goes in preforeclosure once the borrower has been notified by the lender that he is in default. This is the beginning of the foreclosure process. You may find listings of preforeclosures in county or city courthouse buildings and online platforms.
The borrower may sell the property at this stage and prevent foreclosure proceedings, which can negatively impact his credit history. Buying homes in preforeclosure will not be easy, though. For one, you will have to deal with both the homeowner and the lender. Also, state laws and lender policies can slow down the buying process.
Short Sale. Short sales happen when the amount owed is more than the home's current value, and the lender is willing to accept less than the outstanding balance. Also, the borrower does not necessarily have to default with his mortgage payment for a short sale to occur. Generally, the borrower needs to prove his financial hardship that could potentially result in payment default.
Once the lender agrees to a short sale, then the property can be listed, and often such properties are advertised with the phrase "pending bank approval." While the process of buying a short-sale property is similar to buying the traditional way, however, wordings in the contract will differ. Specifically, it will indicate that the lender must approve the terms of the agreement.
Needless to say, the buying process can take longer than the traditional home-buying as lenders can take longer to respond to the offer and be very meticulous.
Sheriff's Sale. The "Sheriff Sale" follows the preforeclosure stage. It is a public auction held to sell the repossessed property. The public auction is meant to allow the lender to recover some, if not all, of the outstanding balance of the mortgage loan.
Such a type of public auction usually takes place at a sheriff's office or the county courthouse. Anyone who wishes to participate must have available funds dully certified they can bid on the property.
Bank-owned foreclosure. If the property does not sell at auction, then it will revert to the lender. This type of property is called a real estate owned or REO property. The buying process of a foreclosed property is similar to that of a traditional property.
Government-owned foreclosure. Homes that are purchased through a government-back loan such as Federal Housing Administration (FHA) and Department of Veterans Affairs (VA), and gone into foreclosure will get repossessed by the government. Homebuyers who want to purchase such type of a foreclosed property must contact a government-registered broker.