Foreclosure is a familiar term in the real estate world. While it may appear daunting, knowing why it happens and what that means for the property owner, lender, and property itself is important.
What Does Foreclosure Mean?
A real estate foreclosure happens when a borrower misses a certain number of monthly mortgage payments or breaks another term of the mortgage contract and the property defaults to the lender. The property is used as collateral for the home loan, which is one reason why lenders require an appraisal - to assure it’s worth the loan amount.
Foreclosure processes and timeline vary from state to state. In Colorado, there are multiple steps including pre-foreclosure prior to the actual foreclosure that begins with a public Notice of Election and Demand (NED) announcing the foreclosure with a scheduled sale date. Beginning no sooner than 120 days after payments are past due, the lender can continue down the foreclosure process to reclaim the property and/or funds. It is not uncommon for the lender to work with the buyer to avoid foreclosure as the foreclosure process is not ideal for either party.
If there is not a way to avoid the foreclosure, the bank can then decide whether to auction the property to the public, reclaim it which is called a real estate owned foreclosure (REO), or allow the borrower to sell it allowing for some or all of the loan to be repaid.
In Colorado, the lender may request a judicial or nonjudicial foreclosure meaning that the case may or may not go to court. If the judicial route is chosen, the lendee has a chance to defend themselves and it will be up to the court to decide. The nonjudicial path is quicker and requires less financial investment from the lender.
Consequences of Foreclosure
One of the most substantial impacts of defaulting on your mortgage is the decrease in your credit score. It not only affects your score and reflects on your record for seven years, but also makes it difficult to get another mortgage loan in the future.
Mortgage insurance is available to most buyers but adds an additional expense to the monthly payments, but it does not rule out foreclosure. Instead, it protects the lender from any financial loss incurred from after the property at auction.
Buying Foreclosed Real Estate
Out of the sale options mentioned below, auctions and quick sales are most common. The bank or lender may list the property and/or allow a quick sale for under market value in order to more quickly recoup their funds, even taking a small loss. Buying a foreclosed property comes with risks such as mold, water damage, structural issues, or other problems stemming from poor maintenance. However, having a thorough inspection before purchase is the first step to knowing what’s to come. Some insurance companies may not offer a policy for a foreclosed home either. Having a knowledgeable real estate professional will help immensely throughout this process as there may be additional liens found in the title search and other unforeseen problems.
Auction
This is the most expedient sale of a foreclosed property and as the bank sets a date for the public to come and bring their best cash offer. This option is relatively the most risky for Buyers as there is no time for inspections and you can’t back out after the auction. However, this can also potentially be in the Buyer’s interest if they’re knowledgeable and capable of renovating, etc.
Real Estate Owned Foreclosure
In this scenario, the lender buys back the home from themselves, ultimately gaining full ownership. The lender will then work with an asset manager who hires a real estate agent to list and sell the property. Sometimes they will evaluate the status of the home before listing it which can help the Buyer make an informed purchase. These real estate contracts are generally very standardized and don’t allow for many contingencies, inspections, etc.
Quick Sale
A quick sale happens before the foreclosure is finalized between the borrower and bank. A third party Buyer comes with an offer to the borrower (while they still own the home). These contracts must be “subject to bank’s approval” which means the bank has to approve the terms including a possible lower sale price than what they initially invested. Some lenders are quick to approve these with good terms to avoid any further processes while others can take months to approve which can detract the Buyers.
Even with today's higher mortgage rates, a big foreclosure wave is not on the horizon. As recent (2020 - 2022) mortgage rates were at all time lows, many borrowers have a very low rate that they can continue to pay off monthly. Since the last foreclosure wave in 2009 - 2012 featuring fallout from the 2007 - 2009 Great Recession, the lending process has become more strict with more screening of buyers. This means that those who have obtained loans are much more likely to be able to repay them, not forcing a foreclosure. In addition, predatory loans such as rates starting very low and then jumped many percent points after a couple years, were outlawed. Keeping both parties (lender and borrower) to more knowledgeable, informed, and standard practices have helped keep the foreclosure rates down.
Although we are not attorneys or lenders, we work closely with both occupations in La Plata County real estate. Please do not hesitate to contact us if you have any questions or concerns about foreclosure or are interested in buying a foreclosed property in the area.
