Conceptually, the foreclosure process is easy to understand. However, in practice, it is anything but simple. Buyers need to know there are pitfalls to purchasing a home in foreclosure. With the housing market slowing and concerns the economy will follow, it is useful for not only for potential buyers but also existing homeowners to understand how and why a bank forecloses on a home.
Many people think the bank owns the home until you pay off the mortgage, or refinance, which pays off the existing loan with a new one, possibly passing it along to a new lender. Actually, the bank merely holds the deed to the house as collateral to secure the loan.
When a buyer falls behind on his or her mortgage payments, the bank will send notices. Eventually, it starts the foreclosure process.
Each municipality has its own laws and ways to deal with a foreclosure. New York State’s Department of Financial Services (DFS) lays out a general timeline. Once you miss your payment, the lender quickly sends out a late charge notice. After one to two months, the bank may send you pre-foreclosure notice. The law states it must do so within 90 days of starting the foreclosure. During this period of time, you have the opportunity to work with the lender to find alternative solutions. The notice has to state how much you need to pay in order to bring your loan up to date and provide a minimum of five non-profit housing counseling agencies.
Within that 90 day time frame, the lender will send you a letter stating you are in breach of the loan’s terms and provide you 30 days to repay what you owe along with any late charges and penalties.
After 90 days, the lender can bring legal action. This involves a lot of steps, including filing a formal notice of foreclosure with the court and serving you notice. The buyer has to respond. Otherwise, the court can automatically rule against you and order a foreclosure sale. Within 60 days, there is a court-mandated settlement conference.
The process is not quick, which is part of the reason why lenders do not like foreclosing on a home. Assuming the foreclosure proceeds, the court proceeding can take many months, and after a court rules against the buyers, a sale can take several more months.
In New York, foreclosure sales are conducted via public auction where the court sells it to the highest bidder.
Can you get a bargain?
A homeowner in distress may look to sell quickly. If the loan balance is below the home’s equity, he or she may provide a discount in order to raise the funds quickly and pay off the loan. This is not the typical scenario, however.
Alternatively, the owners may have worked out a deal with the lenders under a short sale arrangement. You could obtain a good deal under these circumstances, but it typically takes a long time to complete the transaction. You are negotiating with the sellers and lenders.
Since banks do not want to own real estate, you might obtain a bargain on foreclosed or even pre-foreclosed homes. However, it is important to keep in mind that you are competing with savvy investors. You might also find the home is not in great shape and you have to incur significant construction costs.