What Should I Know About Foreclosures?

In today's real estate market, you may be wondering about foreclosed properties, but do not know where to turn for reliable information.

Because so many mortgages are being scheduled for foreclosure, some really good buys can be grabbed up by those in a position to invest in real properties. Too many people in recent years obtained real estate, either houses, apartment buildings, commercial buildings, or land, using adjustable rate mortgages (ARMs) at interest rates, which were at all time low percentages.

Unfortunately, the economy has significantly changed and many of those ARMs experienced huge increases in the adjustable rate of interest. As a result, the monthly payment amount increased. In some cases became too high for some home owners who were only barely managing to make each monthly payment on time at the much lower interest rate. These unfortunate home buyers then find themselves unable to make the minimum payment required to maintain a current status on their home mortgage.

You should know that a foreclosure occurs when a mortgage holder is not paying their minimum required payments and have failed to enter a satisfactory agreement with the mortgage lender in order to keep the mortgage from going into a default status. When a mortgage goes into default, the mortgage lender has the right to take possession of the real property and dispose of it to recoup most or all of the monies provided in the original loan amount.

An important point to keep in mind is that mortgage lenders do not like to find themselves in possession of houses, buildings, and land. Instead, they want the dollars they loaned to be returned to them along with profit in the form of interest. When a mortgage goes into foreclosure, the lender's only real interest is to turn that property into cash and avoid losing their original investment. Because the original mortgage holder has potentially paid funds against the mortgage for months or even years and years, the amount the mortgage lender is seeking to recoup may be well below the fair market value of the property in question.

Let's look at a specific possible scenario. If a mortgage lender had loaned $90,000 to a home buyer purchasing a property valued at $110,000 in 1998 and ten years later the loan goes into foreclosure, only $75,600 of the original $90,000 has not been repaid to the bank prior to loan default and the lender may well accept bids for the property which, for this example, let's say has gone up in value to $129,000 in the past ten years, in the range of $75,600 and up plus closing costs. By learning that you can buy foreclosure properties by having ready access to fund to cover your bid placed on the property at the real estate auction at which the lender disposes of the property, you could potentially bid $85,000 or less and, if your bid is the highest, obtain a property valued at much more than you are required to pay.

It is important that you know that purchasing a foreclosure differs from state to state and even from mortgage lender contract to contract. Some contracts allow a grace period during which the original owner can pay the back payments and regain possession of their property. The legal process which applies to the state in which you want to know more about foreclosure purchases should be investigated locally and you probably want to obtain the advice of a real estate attorney who has handled foreclosure purchases in the past to be sure everything is done in the correct legal manner.