The Foreclosure Process- What is a Foreclosure

Foreclosure Overview & Foreclosure Process


What is Foreclosure?

Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens. The foreclosure process can end one of four ways:

1.              The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.

2.              The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.

3.              A third party buys the property at a public auction at the end of the pre-foreclosure period.

4.              The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure, via a short sale foreclosure or by buying back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).

This foreclosure process allows for three opportunities for finding bargains on foreclosure homes.
 

Pre-Foreclosure (NOD, LIS):

Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property outright. The borrower/owner can walk away with something to show for any equity in the property and avoid a bad mark on his or her credit history. The buyer has time to research the title and condition of the property and can realize discounts of 20-40 percent below market value.

More about pre-foreclosures


Wondering what happens after foreclosure? Then please read on. Remember that understanding foreclosures is the first step for homeowners to stop foreclosure. It is also the first step for investors to buy foreclosure properties.
 

Auction (NTS, NFS):

If the loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction often offers some of the best bargains and avoids the unpredictability of dealing directly with the borrower/owner.

More about Foreclosure auctions

Bank-owned (REO):

If the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender will usually want to re-sell the property to recover the unpaid loan amount. The lender will then typically clear the title and perform needed maintenance and repair; however, the potential bargain for these REO homes is typically less than a pre-foreclosure or auction property. Bank foreclosures can become government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case the government agency would be responsible for selling the property.

Pre-Foreclosure Period and Notice of Sale / Auction

Pre-foreclosure Period

In Minnesota, a court foreclosure begins when a lender notifies the borrower of the default.  The lender then files a court action against the borrower. If the court rules against the borrower, a sale is scheduled. 

The majority of Minnesota foreclosures are handled out of court through a power-of-sale clause contained in the mortgage. Under most mortgages, a lender must mail a default notice to the borrower before scheduling the sale.

With both types of foreclosure proceedings, the borrower can stop the foreclosure any time before the foreclosure sale by paying the default amount, plus fees and allowable costs.

Notice of Sale / Auction

The notice must include the borrower, owner, and lender names; the original loan amount; the mortgage date; recording information; the default amount due; a property description; the time and location of the sale; and the redemption period.  The notice must be published for six weeks, and the occupants of the property must be given the notice in person at least four weeks prior to the sale. 

The county sheriff or sheriff’s deputy conducts the foreclosure sale between 9:00 a.m. and sundown at a public place, usually the sheriff's office. Anyone may bid at the sale, and the property is sold to the winning bidder. If not the lender, the winning bidder must be prepared to pay the full amount in cash or cashier’s check. The sheriff may postpone the sale by publishing a notice in the newspaper where the original notice of sale was published. After the sale, the sheriff gives a certificate of sale to the winning bidder. The certificate of sale effectively transfers ownership and possession rights to the winning bidder after the redemption period.

In Minnesota, a borrower usually has a six-month redemption period, but some property types and mortgages allow for a 12-month redemption period. During this time, the borrower can redeem the property by paying the total amount of the bid plus interest and any applicable costs.