Foreclosure is the process of a lender selling a house or property to a new party when the old borrower can no longer pay off the debt of the mortgage. This way, the lender can reclaim the rest of the payments due by the borrower. Basically, foreclosure is a process that occurs when borrowers fall short of paying their mortgage.
A foreclosure is a legal process in which, the homeowner loses possession of their home. They legal process might be different in different varying from, either selling it in an auction or the lending company getting the rights to the property, but in all cases the end result is the same.
How it Works
The mortgage acts as a collateral against the house, ultimately leading to the lending company taking charge of the property if incase the borrower fails to make the payments. The lending company eventually sells these properties to recover the financial losses they may have faced by lending the property to the previous borrower. These properties are bought by prospective customers or investors looking for a new home.
What Causes Foreclosures?
The cause of foreclosures may vary, generally homeowners are not able to afford the mortgage payments and ultimately lose ownership of their homes. Often it can be a result of lack of financial stability of an individual, death of the breadwinner in a family, too many household expenses, or the increasing expenses of college tuitions parents might have which was not a factor before when their kids were younger. Regardless, the going gets a little too tough sometimes which leads to homeowners to not be able to afford the payments of the mortgage anymore. Legal proceeding for foreclosure can vary depending on your state.
Foreclosures can only initiate after a borrower has missed payments for a consecutive three months before the lending party can take legal actions. Once the borrower has missed out on payments for more than three months, the lending company records a public notice the recorder’s office, to suggest that the borrower has missed out on payments for more than 3 months, thus becoming a defaulter. This is met with a pre-foreclosure phase where the borrower comes to an agreement to pay the owed debt off, either by making a short sale or through other means. Failure of this phase leads to the foreclosure phase, in which the property is sold off in auctions.
Advantages and Disadvantages:
Customers normally prefer buying foreclosed property as they are cheaper to buy than normal priced homes. The reason for them being cheaper is the fact that the companies the own the property want to sell the homes as soon as possible to recover their financial losses. It is also possible that the condition of the houses has deteriorated over its life span eventually leading a cheaper sale. In fact, there are some houses that well for a few hundred dollars.
The reality is that, in a way, foreclosures have made it easier for buyers to buy homes at cheaper prices, which if not foreclosed, would be much expensive to buy and would have made it much less affordable.
Unfortunately, there are not many advantages of buying a property which is foreclosed other than the fact that it would be cheaper to buy. The truth is that often, these properties are in bad physical conditions which makes them unfavorable to buy. Another issue is that there might not be an option of financing the property through means of a mortgage and rather that you may have to make a full payment for it.
- Financial Foreclosed houses sell for cheaper than normal priced houses.
- There may be a chance that previous homeowners try to reclaim the house by repaying the debt of the mortgage, this has been made possible through certain laws.
- Most foreclosed houses do not come with option to finance the property through mortgage. You would have to buy the property through an auction, which would mean paying in cash and in full amount, which can get quite expensive.
- The houses for foreclosure are generally in bad conditions and may be in need of renovation. This is the case that for the homeowners who could not pay the debt of the mortgage, might not have been able to pay for the maintenance of the house either.
- Due to the fact that foreclosed houses are in need of some maintenance, buyers would want to everything to be fixed prior to them buying the house. The lenders who are selling the property may not be willing to pay for the maintenance of the house since they are selling it at a cheaper selling point and it also important for the lending company to sell the property as quickly as possible so they might look for buyers who do not fuss over such things.