Foreclosure Watch: Part 1
With the dreaded “F” word looming in many homeowners’ minds, I wanted to take some time to help educate you on what Foreclosure is and how it may affect you if you’re looking to sell a current home, or buy a property in today’s market. Let’s start with the basics:
What is a Foreclosure?
Foreclosure occurs when a bank, the government, or another source takes over the legal right to a property when a homeowner defaults on a mortgage or does not pay their property taxes. To keep it simple, let’s stick with the notion that the bank is foreclosing for the rest of this article.
When Does Foreclosure Actually Happen?
When a homeowner purchases a property, unless they are paying with cash, they usually obtain a loan from a bank or other financial institution known to most people as the “mortgage”. In actuality, the home owner gives a mortgage to the bank when they sign a promissory note. They mortgage their home as collateral, in order to obtain money to pay for the house, and thus have the right to live or rent out the property.
At the time of closing, they sign the promissory note, which is exactly what it sounds like: a promise to pay back the loan to the bank within the time period and upon the conditions both parties agree to. If the homeowner (mortgager) defaults or misses a payment, they go into a period of pre-foreclosure, in which the bank (mortgagee) usually assess additional late fees and calls their earlier missed payments due. If the homeowner does not meet the terms of the lender during this period, the home is sold at a sheriff’s sale, and can be purchased by another investor or party. If no one bids on the property at the sheriff’s sale or if the amount offered is not enough in the eyes of the bank, then the lender will exercise their right to foreclose, and take possession of the home.
What About The Redemption Period?
In the state of Minnesota, the homeowner then has an additional 6 month period which is known as the Statutory Redemption Period that allows them to pay off the entire loan amount and keep the house. At the end of this period, the lender takes back the house and will sell the property in order to recoup funds that they lost from loaning money for the original purchase of the house.
In most cases prior to 2005, the lender was able to recoup most or all of their money because of appreciation in the home’s value. However, as the market turned from a seller’s market (more willing and able buyers than homes available) to a buyer’s market (more available homes than willing and able buyers), prices fell and banks could not sell properties for what they paid just several years ago. Regardless of the market conditions, at the end of this 6 month period, the homeowners or tenants living in the house must vacate, and it becomes an REO (Real Estate Owned) property on a bank’s asset roll.
(This is the first in a series of articles dealing with foreclosures. Keep checking back for more posts on the “F” word.)
If you have questions about buying a foreclosure as a first time home buyer, contact me and we will examine your options.
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