Understanding the Pre-Foreclosure Process

It’s no secret that home loans are being foreclosed upon in record numbers. Traditional reasons such as job loss, divorce and medical bills are still in evidence. However, there is a newer reason as well. The lenders have actually added to their own problems by making home loans at unreasonably low interest rates for a limited initial time period.

After the initial period, the rate goes up, and sometimes the borrower is not able to make the new higher payment amount. The banks, and other home loan lenders, are seeing ever-increasing payment defaults, which in turn has caused them to initiate foreclosure proceedings.

The first phase of the foreclosure process is called pre-foreclosure. After a period of missing payments, usually no more than three months, the lender will send a notice of default to the borrower. If the borrower and lender cannot reach a mutually acceptable solution, the lender proceeds to complete the foreclosure process and take possession of the house. The time period varies according to the lender and also by state regulations, which are not all the same.

In the broadest sense, there are two types of foreclosures. They are known as judicial and non-judicial. Each state has different foreclosure rules and some states favor the judicial method, while others go for the non-judicial process.

Non-judicial foreclosures are usually faster that the judicial type. In states using non-judicial foreclosure methods, the terms and conditions that define foreclosure and its process are stated in the original loan agreement. The lender simply asserts default and proceeds according to the agreed procedure. The process can take as little as two months. However, the borrower may contest it, but if unsuccessful, will also be liable for legal fees associated with the appeal.

In a state that uses the judicial type of foreclosure proceedings, the timeframe is usually much longer, six months or more. This is because the court is involved in the process from the beginning. At the same time as the initial default letter is sent, a notice of intent to foreclose is filed with the court. The court tends to grant more time to the borrower to respond and then after that, a court date is set.

In either case, it is important to remember that the bank doesn’t really want your property. They prefer, within limits, to allow you work out your payment problems. That’s why it is important to communicate with your lender early and often at the first signs of payment trouble.

While the foreclosure process, regardless of which type, is difficult for both the lender and, of course, the borrower, it does offer opportunities for savvy investors. As mentioned, the bank doesn’t want your property. If they are required to retake possession via the foreclosure process, they will immediately try to resell the house, almost always at a big discount. Investors that understand real estate transactions as well as the local market, can often find great values among foreclosed homes.

If you are not experienced, don’t be lured by the high profits. There are many ways to get financially hurt as a buyer of foreclosed properties. Expensive renovations, problems with the title, non-liquid resale markets and many other problems can creep up on the inexperienced buyer.

Original: Understanding the Pre-Foreclosure Process