Finance

What Does Foreclosure Mean? All Your Questions Answered

Did you know a lot of people are buying homes right now? Have you considered buying a foreclosed house? If you want to learn about foreclosed homes, we can help.

In this guide, we’ll answer your question on “What does foreclosure mean?” You’ll learn about the foreclosure process. 

Want to learn more? Keep reading.

What Does Foreclosure Mean?

If a borrower doesn’t pay the mortgage, the lender or mortgage investor will repossess and sell the house. It can occur if the homeowner also doesn’t pay homeowners association fees or property taxes.

The legal process’s called foreclosure, and the original investor or lender will take the home back. If a home is in foreclosure, the property is currently going through the process.

REO or a foreclosed home is a property that went through the foreclosure process. Now the home’s owned by the bank or lender. The real estate-owned property’s known as REO.

REO or foreclosed homes are of interest to buyers. These homes are a lot cheaper compared to non foreclosed homes. Are you shopping for homes in Chicago? Check it out.

How Does the Process Work?

After the foreclosure, the lender will take control of the property. The lender will try to sell it and get back money lost from the default.

The borrower guaranteed repayment when they provided collateral. The home will get used as collateral, and the borrower will know the lender can foreclose the house if they don’t pay.

This is known as putting a lien on the title of the house. After the mortgage gets paid, the lien will be removed.

The home can get used as collateral, and the borrower knows the lender could foreclose the home.

Unexpected Disasters

When people get their mortgage, most can make the payments. Lenders will verify your income and look into your credit history. Also, they will put a limit on the borrower’s debt to income ratio.

Yet, sometimes, unexpected things can happen. Some people lose their job, take on new debt, or have unexpected expenses. Some people will need to move before they sell their homes.

Others experience a higher living expense or natural disaster.

Higher Mortgage Payment

Homeowners can also end up foreclosing because of an increase in mortgage payments.

People with an adjustable-rate mortgage could have an increase in interest. The growth ends up impacting their mortgage payment.

Sometimes there’s an escrow shortage because of a rise in insurance premiums or taxes.

Homeowners’ insurance and property taxes get paid through the mortgage payment as well.

Underwater Mortgage

An underwater mortgage is a loan that has a higher principal than the free-market value of the house. People get into this situation when property values fall.

The homeowner might not have equity available for credit. An underwater mortgage will prevent a borrower from selling the home or refinancing.

Some homeowners will walk away and let the lender handle things.

What’s the Foreclosure Process?

Two kinds of foreclosures can occur. A judicial foreclosure will involve a homeowner contesting the foreclosure. A nonjudicial foreclosure doesn’t need court action.

There are five stages. The initial stage includes the missed payments. After the homeowner misses payments and doesn’t uphold the deal, the lender comes to collect.

Homeowners don’t know the process is expensive for lenders too. Most lenders want to work with a homeowner, and they might restructure the loan.

You’ll receive public notice. After the homeowner misses up to six months of payments, the lender gives a public notice or will file a lawsuit.

It’s called a notice of default or lis pendens. The public notice is a written piece to the homeowner. The lender will pursue legal steps if the debt doesn’t get paid.

If the lender records the notice, the foreclosure process will begin. The home enters the earlier stages of repossession. The homeowner has 90 days to take action.

How Do You Avoid Foreclosure?

To avoid foreclosure sales and eviction, owners can do a few things.

Homeowners can pay the outstanding balance or sell the property because there’s equity to pay off the loan. They could also sell the property in a short sale before it heads to foreclosure.

Sign the deed to the lender instead of foreclosure.

What About the Short Sale?

A short sale is an option you can choose. You will sell your house before foreclosure. The selling price will come up short of the balance owed.

When this occurs, the proceeds from the sale will go to the lender, and the deal can’t happen unless the lender approves it.

A short sale is preferred, and it’s less damaging to the homeowner’s credit and ability to get another mortgage.

Also, the lender will recover the loan balance and avoid the expense of a foreclosure. The homeowner can keep the money left over once the mortgage gets paid.

Deed in Lieu of Foreclosure

You can avoid foreclosure with a deed instead. The homeowner will sign the deed to the bank or lender and get released of mortgage obligations.

The homeowner’s credit won’t take as much of a hit. The lender won’t have to spend on the foreclosure process.

Buy a Foreclosed House

We hope you now have the answer to “What does foreclosure mean?”

Most homeowners look at different options before foreclosure. A foreclosure will cost the lender a lot of money and time. Homebuyers can get a deal on a foreclosed home.

Are you looking for more real estate tips? Check out our resources on the blog.

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