What Does Pre Foreclosure Mean and How to Avoid

What does pre foreclosure mean? Pre-foreclosure refers to the early stages of a home being repossessed owing to a mortgage default by the property owner.

House Foreclosure is the process in which the bank or lender takes the right of the home from homeowners. The bank or the lender where the household borrowed the money has the right to evict the household within the home and control the property.

This means that the household will not have the proprietorship with the home once it becomes foreclosed. On the other hand, most of the banks or lenders still sell the property within the market to recover their financial loss.

Typically, house foreclosure happens when a household is not capable of paying the mortgage loan that was used to buy the home anymore.

The foreclosure rate in the United States reached its peak in 2010 after the financial crisis of 2007-2009. This is the time where mortgage loans and debt of U.S citizens incredibly boost and impact many individuals.

According to the Statista Research Department, the foreclosure rate in the United States last 2020 is 1.16%. Even though it is a small portion, the homeowners, banks, and lenders that are affected still suffered a financial hardship.

When a house becomes foreclosed, there will be no longer owners of the property until the bank or lender finds a new one.

Why Do Homes Become Foreclosed?

When a household makes a house loan, financial stability is the most important requirement for it. House foreclosure is a result of the financial hardships of a household upon paying the loan they had.

The process of house foreclosure can start when a household is not able to pay even once. However, there are various possible reasons and aspects on why a household cannot make the monthly payments of the mortgage.

Some of these causes are the  following:

  • Loss of employment or being unemployed.
  • Emergency expenses such as medical and health bills.
  • Lack of financial support from other members of the household.
  • High costs of maintenance, utilities, and repairs for the home.

During this time of pandemic where life is difficult, households must always think about the risk of having or applying for a loan. Being financially stable is hard to maintain nowadays.

Always ensure the household’s capability of paying the mortgage costs of loans. This must be done by every household before having a loan. It will not just avoid problems, it will also help us to not waste our sacrifices.

Once a process of house foreclosure begins, it would be hard for the household to recover the property.

How Do Homes Become Foreclosed?

The process of house foreclosure is legal and systematic. The rules, regulations, and processes vary in each local state of the United States. However, there are common stages or phases on how a home becomes foreclosed.

Refer to the list below for the process of house foreclosure.

Stage 1: Default on Mortgage Payment

The process starts as homeowners are not able to pay for their mortgage loans. Usually, the due for monthly payment is every first day of the month but lenders can give a grace period for households up to the 15th day of the month.

For the first delay, lenders can still update the households to fix their payments. On the second default, the lender and household must arrange their transactions to avoid foreclosure.

By the third time, the lender will send a demand letter to the household and will give them 30 days to fix their mortgage payment.

Stage 2: Default Notice

A Notice of Default (NOD) will be sent when households are unable to provide payments within four months.

It means that they are 90 days behind the due date of payment. The lender will give the household another 30 days to fix their payment.

Stage 3: Trustee’s Sale Notice

This process may vary depending on the local state. Some states with Nonjudicial Foreclosure will just require the necessary forms to start the process.

However, Judicial Foreclosure will require court approval to start the process. This means that Nonjudicial Foreclosure is faster rather than Judicial Foreclosure. With these, the property will start the Notice of Sale process.

Stage 4: Trustee’s Sale

Once the home was noticed as a sale, biddings for the property will start. When the lender recognizes the highest bid, the process of sale will start to properly buy the home.

Stage 5: Real Estate Owned (REO)

When there’s no interest in the property, lenders or banks will claim the proprietorship for the home. The Real Estate Owned (REO) asset manager will assist them with this process.

Stage 6: Eviction

As the process of sale will be done and the name and title of the property was changed, lenders can now evict the former household of the home. From that, the new owner will control and manage the property.

How to Avoid Home Foreclosure

To simply avoid the foreclosure of a home, the household must pay their respective mortgage payment on time. They must be aware of their payments and fix possible problems that they may encounter.

Moreover, good communication with the bank or lender is a good thing to avoid home foreclosure.

How to Buy Foreclosed Home?

The process of buying foreclosed homes can be done in three different ways.

Refer to the following process below.

Short Sale Purchase

Short Sale Purchase happens when the homeowner sells the property at a lower price rather than the amount they owe. The bank or lender must first approve the process to start it.

Auction Purchase

Auction Purchase happens when the lender sells the property. It is the fastest way of purchasing a foreclosed home but most lenders require cash payments. The disadvantage of this way is that the home will be in “as is” condition when it was purchased.

Bank Purchase

Bank Purchase happens when the banks sell the property. Usually, banks do not sell the home directly, the Real Estate Owned (REO) asset manager assists it. Moreover, it is a safe way as the banks handle the name and title of the property.

Is it Worth it to Buy Foreclosed Homes?

Individuals who want to buy a house with an affordable budget suit foreclosed homes. However, they must find and get the right and appropriate property for them.

Below are some of the advantages and disadvantages of buying foreclosed homes.

Advantages
  1. It offers a lower price than non-foreclosed homes.
  2. Title concerns can be done fast in a legal process.
  3. Can apply for home loans upon purchasing foreclosed homes.
Disadvantages
  1. Maintenance concerns of the property.
  2. “As is” condition of the home.
  3. Redemption Period.
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