Foreclosure Loans – How It Works?
Category : Hard Money Loans , Real Estate Loans
First off, I would like to clear one thing. This post is not for home owners i.e. people who are still living in a home, which is in a foreclosure situation.
This post is only for those foreclosure investors who are willing to invest in a home, which is in a foreclosure situation and is vacant.
It is very important to realize that foreclosure loans are not a single event but it is a whole process, which has different parameters and steps.
When you a buy a property, you need to sign two things. One is either a mortgage or a trust deed and the other is a promissory note, which is kind of a contract between the borrower who is taking a loan and assuring the other party i.e. lender that he will pay him back.
This promissory note is made against an asset i.e. your property and it means that if the borrower wouldn’t be able to pay back to the lender in time, then the lender can start the foreclosure process against that asset.
This is the main concept behind foreclosure loans.
The first step of foreclosure starts when you are due your payment and your lender sends you a notice reminding you about the promissory note.
At this point, the lenders may give you an opportunity to pay back or maybe not. It depends upon them on how they want to carry it forward.
Depending upon that particular state’s rules and regulations, the lenders can submit lis pendens or a notice of default against your property.
After this, there will be a waiting period, which varies in every state. In some states, it may take up to 60 days. Whereas, in others it may 6-9 months. You have to check the timeline in the state your property is located.
After the submission of notice of sale or default, it could be checked in a County Recorder. In some states, you will have to go to the county recorder office and check it by yourself but some of them are available online too.
Here, it is important to understand that the notice of default and notice of sale are entirely different events happening in different timeframes.
So, after the issuance of notice of default, publication of the sale of property happens in a newspaper. These are not the national newspapers but are specifically related to real estate.
After the notice of sale has been published for some time, then the actual sale of the property happens. There will be an announcement about the sale in the newspaper, which will have the time and location details.
On that particular day of sale, every real estate investor who is interested in buying the property will be there to take part in the bidding process.
The lender will start the bid and investors will be asked to bid against that. If the lender has placed a higher bid, which no one can afford, then may be there wouldn’t be any bidding and the lender will have to lower the price.
In the other scenario, different investors will bid and the one with the highest bid will win.
Now again, the situation would be different in different states. Some state will give some time before selling the property to the bidder and if the borrower can pay his loan off, then he can retain the property. Others just sell it on the spot.
There are two types of foreclosure process, one is judicial and the other is non judicial. If your property is located in a state, which follows judicial foreclosure process, then you need to go in front of a judge and everything will take place in front of him. Whereas, in non judicial foreclosure process, there is no need of a judge.
At some places, you will have to take cash with you at the foreclosure sales and at some, you need to take the cheque.
Another important thing, which you will have to do is to put some money down like between -10,000 and you will have to make a commitment that you will pay the rest by a particular deadline.
Before applying for foreclosure loans, one should have a detail view about how the whole foreclosure process proceeds and what are the foreclosure laws.
Most of the times, you can pay cash and then get a refinancing from your hard money lender, so the things keep moving.
One of the most risky things associated with foreclosure is that you never know that you will get the property or not. So, if you will ask your lender to send evaluators to draw comparables, which will cost you extra money.
It is very important to realize that foreclosure loans are not a single event but it is a whole process, which has different parameters and steps.
When you a buy a property, you need to sign two things. One is either a mortgage or a trust deed and the other is a promissory note, which is kind of a contract between the borrower who is taking a loan and assuring the other party i.e. lender that he will pay him back.
This promissory note is made against an asset i.e. your property and it means that if the borrower wouldn’t be able to pay back to the lender in time, then the lender can start the foreclosure process against that asset.
This is the main concept behind foreclosure loans.
The first step of foreclosure starts when you are due your payment and your lender sends you a notice reminding you about the promissory note.
At this point, the lenders may give you an opportunity to pay back or maybe not. It depends upon them on how they want to carry it forward.
Depending upon that particular state’s rules and regulations, the lenders can submit lis pendens or a notice of default against your property.
After this, there will be a waiting period, which varies in every state. In some states, it may take up to 60 days. Whereas, in others it may 6-9 months. You have to check the timeline in the state your property is located.
After the submission of notice of sale or default, it could be checked in a County Recorder. In some states, you will have to go to the county recorder office and check it by yourself but some of them are available online too.
Here, it is important to understand that the notice of default and notice of sale are entirely different events happening in different timeframes.
So, after the issuance of notice of default, publication of the sale of property happens in a newspaper. These are not the national newspapers but are specifically related to real estate.
After the notice of sale has been published for some time, then the actual sale of the property happens. There will be an announcement about the sale in the newspaper, which will have the time and location details.
On that particular day of sale, every real estate investor who is interested in buying the property will be there to take part in the bidding process.
The lender will start the bid and investors will be asked to bid against that. If the lender has placed a higher bid, which no one can afford, then may be there wouldn’t be any bidding and the lender will have to lower the price.
In the other scenario, different investors will bid and the one with the highest bid will win.
Now again, the situation would be different in different states. Some state will give some time before selling the property to the bidder and if the borrower can pay his loan off, then he can retain the property. Others just sell it on the spot.
There are two types of foreclosure process, one is judicial and the other is non judicial. If your property is located in a state, which follows judicial foreclosure process, then you need to go in front of a judge and everything will take place in front of him. Whereas, in non judicial foreclosure process, there is no need of a judge.
At some places, you will have to take cash with you at the foreclosure sales and at some, you need to take the cheque.
Another important thing, which you will have to do is to put some money down like between -10,000 and you will have to make a commitment that you will pay the rest by a particular deadline.
Before applying for foreclosure loans, one should have a detail view about how the whole foreclosure process proceeds and what are the foreclosure laws.
Most of the times, you can pay cash and then get a refinancing from your hard money lender, so the things keep moving.
One of the most risky things associated with foreclosure is that you never know that you will get the property or not. So, if you will ask your lender to send evaluators to draw comparables, which will cost you extra money.