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When a loan or mortgage on a property has become past due, a foreclosure is the means by which a bank or other lender can reclaim the property from the borrower. Normally when a person borrows money to purchase physical property like a house, car or boat, the person agrees with the lender to make timely payments of a specified amount on a certain schedule. Depending upon state law, lenders can initiate foreclosures after one or more missed payments.
There are several ways in which foreclosures can be initiated. A bank can notify the borrower that his loan is in default and the property will be seized by a certain date. This gives the borrower a chance to make up the payments, or to sell the property in order to cash out any equity. In other cases, the lender may merely seize the property, called a deed in lieu of foreclosure. By reclaiming the property, the lender then has the right to sell the property, often at a reduced price. The lender’s attempt is to get back the money still owed on the property, so foreclosure sales or auctions may offer the property at below market value.
Deed in lieu of foreclosure, or strict foreclosures as they are often called is the worst alternative for borrowers. Some states do have laws that entitle borrowers to the equity they own in the property. If the lender makes a profit on the sale, the borrower may get to keep a portion of the profit — however, the lender is under no obligation to sell the money at a profit. The lender may merely want to recap his/her losses quickly.
Foreclosures that offer notification of default to lenders are of the most advantage to the borrower. The borrower might be able to come up with the money, or sell the property at a profit or above market value. Alternately, at least the borrower has the opportunity to pay the debt instead of having the debt foreclosed, which is detrimental to credit rating.
People facing foreclosures can temporarily halt proceedings by filing for bankruptcy. This gives the borrower an opportunity to renegotiate with the lender in hopes of an easier payment schedule. Depending upon the length of bankruptcy proceedings, the borrower may have to pay several months of back payments in order to make good on the debt.
Foreclosures can get challenging when more than one person claims ownership to property. A lender must notify all owners of intent to foreclose to give all owners an equal opportunity to pay payments owed prior to seizure or sale of the property. Most states have laws specifying how much time joint owners get before the property can be seized or sold.
Some people make a profit by purchasing real estate or other property that is sold at foreclosure sales. In fact, there are numerous infomercials that suggest purchasing at foreclosures and auctions will translate to instant money. These claims need to be taken with a grain of salt. Auctions for foreclosed properties are often well attended and quite competitive.
If the property does not sell for the amount of the loan, can a lender come after other property you own that is not secured by that loan? Can they come after other assets?