Whether you’re an investor or a prospective homebuyer, you may consider purchasing a foreclosure home. But what does foreclosure mean? The foreclosure meaning can be complex, as it involves several legal processes that are important to understand. In this guide, we’ll walk you through the pre-foreclosure, foreclosure, and REO foreclosure meanings so you can better understand the foreclosure process and how to purchase a foreclosure home.
Defining Terms: Pre-Foreclosure vs Foreclosure Auction vs REO Auction
Before diving into how the foreclosure process works, it’s important to know the definitions of key terms involved in the foreclosure process. Keep reading below to learn about pre-foreclosure, foreclosure auctions, and REO auctions.
Pre-Foreclosure
What is pre-foreclosure? Pre-foreclosure is the first step in the foreclosure process that can lead to foreclosure. When you first buy a home, you will often sign a contractual agreement with a loan service provider to help pay for the home, known as a mortgage. Typically, the terms and conditions outlined in the mortgage will require the borrower to make monthly payments, where a portion of the payment will go toward the principal balance, and another portion will cover the interest accrued.
If a borrower fails to make their mortgage payments on time, it will be considered a default. In most cases, a default occurs after a borrower fails to make payments for three consecutive months. When this happens, the lender may begin the pre-foreclosure process.
So, what does pre-foreclosure mean? As stated, pre-foreclosure is the start of the legal proceeding that can lead to foreclosure. When a borrower defaults, the lender will send a notice of default to the borrower notifying them of their missed mortgage payments. The notice of default will also have to be filed with the court, making it a public record.
The pre-foreclosure process varies by state and can take anywhere between a few weeks to more than a year. Pre-foreclosures and foreclosures can be an expensive and time-consuming process for lenders and borrowers. During this stage, lenders may be willing to work with borrowers to negotiate payments and any loan adjustments to avoid foreclosure costs.
If a borrower receives a notice of default letter, starting the foreclosure process, the lender may allow the borrower to attempt to sell the home for less than what they owe. This process is known as a short sale because the home’s final selling price might be lower than the outstanding loan balance. Additionally, the buyer’s offer will often need to be approved by the bank or lender for the transaction to go through. It’s also important to note that not all short sales are pre-foreclosures. In some cases, if homeowners know they are falling behind on payments, they may sell their home before they reach the pre-foreclosure stage.
Foreclosure
You now know what pre-foreclosure is, but what is foreclosure? Foreclosure is a legal proceeding that usually takes place in the form of an auction when a borrower fails to uphold the terms outlined in a mortgage or deed of trust. When this happens, the lender can use the property as collateral in an attempt to recover any missing payments.
Foreclosure laws vary by state, including what notices the lender is required to post publicly, and the options homeowners have for making their loan current to avoid a foreclosure. Most foreclosure auctions, sometimes called trustee or Third-Party Sales (TPS), take place in person in a local public location like a county courthouse. The sale is known as a foreclosure, when a lender tries to sell a property to a third party to recover the outstanding loan sum. Since foreclosure homes are sold "as is," any unpaid taxes, liens, or encumbrances may be the buyer's responsibility. Interior access is not permitted because the borrower still owns the house.
Real Estate Owned (REO)
What is an REO foreclosure? REO stands for “real estate owned,” and the REO foreclosure meaning refers to a property that did not sell at the foreclosure sale. When this happens, ownership returns to the lender and is added to their portfolio of "Real Estate Owned" properties.
REO is sometimes referred to as "bank-owned" properties. It’s when banks attempt to sell their REO properties quickly since they do not want to own real estate. Some homes are put on the market right away, either through a standard real estate listing process or an online auction. These homes may be advertised as "newly foreclosed" or "recently foreclosed." Additionally, before being relisted for sale, REO homes may undergo some maintenance and renovations to increase their overall market value.
How Does the Foreclosure Process Work?
Now that we know the pre-foreclosure meaning, foreclosure meaning, and REO foreclosure meaning, let’s explore how the foreclosure process works. While the foreclosure process varies from state to state, most foreclosures follow these steps:
Homeowner defaults: For a foreclosure to occur, the borrower needs to default on their mortgage payments. A borrower failing to make one or more payments can trigger a foreclosure.
The lender sends notice of default: When a homeowner starts missing mortgage payments, the lender will send a notice of default, typically after three or four missed payments. This becomes a public notice, and the homeowner will have a set number of days to make up for past due payments to avoid the foreclosure process from proceeding.
Foreclosure filing: If the borrower fails to remedy past due payments, the next step might be a foreclosure filing. States are either judicial foreclosure states or nonjudicial foreclosure states. In nonjudicial foreclosure states, lenders only need to file the necessary paperwork with the court, making the foreclosure process much faster. However, in judicial foreclosure states, the court must approve each step of the foreclosure process. One of the steps is filing a foreclosure lawsuit against the borrower, which will go before the court.
Foreclosure auction: The next step is the foreclosure auction when the property is put up at public auction and typically awarded to the highest bidder. With a foreclosure auction, the homeowners may still occupy the home, which means bidders can’t view or inspect the home and often have to purchase the property “as is.” When the sale is completed, the deed will go to the winning and accepted bidder.
Bank-owned auction: If a foreclosure property fails to sell at a foreclosure auction, the lender will become the owner of the property, making it a bank-owned or real estate-owned (REO) property. When this happens, the bank will work with a broker and an auction house to sell the home.
What to Do if Your Home Goes into Foreclosure
If your home goes into foreclosure, there are a few things you can do to help prevent the foreclosure, including:
Paying back payments: If you missed several payments, you may ask the lender if you’re able to make back payments to get back in good standing.
Negotiate with your lender: Foreclosures can be time-consuming and expensive, which means lenders may be willing to negotiate payments and loan terms.
Request for forbearance: Homeowners who are experiencing a temporary financial hardship can request a mortgage forbearance that puts a temporary hold on mortgage payments.
Buying a Home in Foreclosure
Buying a home in foreclosure can be a lucrative purchase, as foreclosure properties can yield a lucrative return on investment. Whether you’re looking to invest, flip, buy and hold, rent, or live in a foreclosure home, you can find properties at online auction sites like ServiceLink Auction. At ServiceLink Auction, we have a wide range of newly foreclosed, foreclosure, short sale, and bank-owned homes to choose from.