Buying Your First Foreclosure
Are foreclosures an option?
A foreclosure property is a home that has been repossessed by the lender because the owners failed to pay the mortgage. Thousands of homes end up in foreclosure every year. Economic conditions affect the number of foreclosures, too. Many people lose their homes due to job loss, credit problems or unexpected expenses. It is wise to be cautious when considering a foreclosure. Many experts, in fact, advise inexperienced buyers to hire an expert to take them through the process. It is important to have the house thoroughly inspected and to be sure that any liens, undisclosed mortgages or court judgments are cleared or at least disclosed.
What types of foreclosure are there?
Judicial foreclosure action is a proceeding in which a mortgagee, a trustee or another lienholder on property requests a court- supervised sale of the property to cover the unpaid balance of a delinquent debt. Nonjudicial foreclosure is the process of selling real property under a power of sale in a mortgage or deed of trust that is in default. In such a foreclosure, however, the lender is unable to obtain a deficiency judgment, which makes some title insurance companies reluctant to issue a policy.
How do you find repossessed homes?
These properties are available for sale to both homeowner-occupants and investors. You can only purchase foreclosed properties through a licensed real estate agent. Foreclosure companies will pay the broker's commission up to 6 percent of the sales price. Down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from the conventional market's 5 to 20 percent. One caution. foreclosed homes are sold "as is," meaning limited repairs have been made made but no structural or mechanical warranties are implied.
Where can you find foreclosures?
What happens at a trustee sale?
Trustee sales are advertised in advance and require an all-cash bid. The sale is usually conducted by a sheriff, a constable or lawyer acting as trustee. This kind of sale, which usually attracts savvy investors, is not for the novice. In a trustee sale, the lender who holds the first loan on the property starts the bidding at the amount of the loan being foreclosed. Successful bidders receive a trustee's deed.
What are problems buying foreclosures?
Buying directly at a legal foreclosure sale is risky and dangerous. It is strictly caveat emptor ("Let the buyer beware"). The process has many disadvantages. There is no financing; you need cash and lots of it. The title needs to be checked before the purchase or the buyer could buy a seriously deficient title. The property's condition is not well known and an interior inspection of the property may not be possible before the sale, says James I. Wiedemer, author of "The Smart Money Guide Bargain Homes, How to Find and Buy Foreclosures." In addition, only estate (probate) and foreclosure sales are exempt from some states disclosure laws. In both cases, the law protects the seller (usually an heir or financial institution) who has recently acquired the property through adverse circumstances and may have little or no direct information about it.
What about buying a foreclosure "as is"?
Buying a foreclosure property can be risky, especially for the novice. Usually, you buy a foreclosure property as is, which means there is no warranty implied for the condition of the property (in other words, you can't go back to the seller for repairs). The condition of foreclosure properties is usually not known because an inspection of the interior of the house is not possible before the sale. In addition, there may be problems with the title, though that is something you can check out before the purchase.
How do you get financing for a foreclosure?
One reason there are few bidders at foreclosure sales is that it is next to impossible to get financing for such a property. You generally need to show up with cash and lots of it, or a line of credit with your bank upon which you can draw cashier's checks.
The first signs of financial difficulty
This first stage occurs even before you begin to miss payments. This is where you begin to experience financial difficulty, and have trouble keeping up with the bills. At this stage, it is important to:
- Prioritize your spending
- Eliminate any unnecessary expenses
- Make a budget
- Prioritize important payments, such as your Mortgage
Missed Payments and Arrears
This is the stage when your mortgage payments begin to get missed. At this stage, you can expect:
- Calls from your lender to begin about the arrears
- If the missed payments are not caught up right away, the bank will send your file over to their lawyer
- Once your file is with the lawyer, you will no longer receive calls from the bank, nor will they accept any payments from you
The Account is Sent to a Foreclosure Lawyer
This is the stage where the bank/lender forwards your file over to a foreclosure lawyer to collect on arrears plus legal fees. At this stage you can expect:
- A demand letter to be drafted by the lawyer and sent to you via email and/or regular post.
- You will need to pay up the arrears plus all additional legal fees as specified in the demand letter by the date specified
- If the payment is not remitted to the lawyer in full by the demand date, the lawyer will begin foreclosure proceedings
The Foreclosure Begins and a Statement of Claim is Sent
At this stage, your lender’s lawyer files a Statement of Claim in court. This step officially begins the foreclosure process. At this stage:
- A Statement of Claim to be served upon you
- The document will include the details of the amount owed to the lender along with the remedy sought by the lender to reclaim the amount owed
- A per diem rate of how much per day you will be charged until the matter is resolved will be stipulated in the document along with the amount owed along with continued accumulation of legal fees
The Redemption Period
The redemption period is the amount of time granted to a homeowner by the court to pay back the arrears or sell the house. At this stage:
- The judge can grant up to a maximum 6 month redemption period if the homeowner has sufficient equity in the property
- Conversely, the judge can also grant a minimum of a 1 day redemption period if the homeowner has little to no equity in the property
- Farmland may be granted up to a 1 year redemption period
- If you pay back all arrears and fees in full during the redemption period, the legal proceedings end
If the arrears have not been paid by the end of the redemption period, the court will grant the lender the right to list and sell the property via a Judicial listing. At this stage:
- The lender will have had ordered an appraisal and submitted to the court an Affidavit of Value and Affidavit of Default to determine the judicial listing price
- The lender will be allowed by the court to list the property at the judicial listing price agreed to by the court
- If there is little to no equity in the property, the judge may choose to directly grant an order for foreclosure to the lender
Order to Accept Offer / Foreclosure Order
At this final stage of the foreclosure process, the lender sells off the property, or a foreclosure order is granted. At this Stage:
- If an offer to purchase comes in, the court will grant an Order to Accept Offer to the lender
- If there are no offers, or if the homeowner has no equity in the property, then an Order for Foreclosure is granted to the lender
- If the mortgage is CMHC or Gengrowth insured, and the lender is still owed a balance after the house is transferred, the lender can further ask the court for aDeficiency Judgement against you for the amount still owing.
- If a deficiency judgment is filed against you, you are personally liable for this amount