- INTRODUCTION
A foreclosure is a legal procedure whereby the property
that is pledged as security in the mortgage document
or deed of trust is sold to satisfy the debt. The foreclosure
procedure brings the rights of the parties and all junior
lienholders to a conclusion and passes title in the
subject property to either the person holding the mortgage
document or deed of trust or to a third party who purchases
the realty at a foreclosure sale. Property sold by foreclosure
is free of the mortgage and all junior liens.
- METHODS OF FORECLOSURE
- Judicial Foreclosure: Pledged property is sold
by court order after the mortgagee has given sufficient
public notice. Upon a borrower's default, the lender
may accelerate the due date of all remaining monthly
payments. Then the lender's attorney files a suit
to foreclose the lien.
- Nonjudicial Foreclosure: States such as Maryland
allow nonjudicial foreclosure procedures to be used
when a power of sale clause is contained in the
security instrument.
- Strict Foreclosure: After appropriate notice
has been given to the delinquent borrower and the
proper papers have been prepared and filed, the
court establishes a specific time period during
which the balance of the defaulted debt must be
paid in full. If this is not done, the court usually
awards full legal title to the lender. This method
is a minority view today.
- DEED IN LIEU OF FORECLOSURE
An alternative to foreclosure would be for the lender
to accept, or "buy" a deed in lieu of foreclosure from
the borrower. This is sometimes known as a "friendly
foreclosure" because it is by agreement rather than
by civil action. The major disadvantage to this manner
of default settlement is that the mortgagee takes the
real estate subject to all junior liens; foreclosure
eliminates all such liens.
- RIGHT OF REDEMPTION
This concept provides that if, during the course of
a foreclosure proceeding but before the foreclosure
sale, the borrower or any other person who has an interest
in the real estate (such as another creditor) pays the
lender the amount currently due, plus costs, the debt
will be reinstated as before.
In most states, equity of redemption is allowed but
the statutory periods may be different. A defaulted
borrower has to make redemption by paying the necessary
funds to the mortgagee as provided by law, usually before
the foreclosure sale has been completed----that is,
before the court officer delivers the sale deed to the
purchaser. Sometimes, a state permits redemption even
after the auction sale. Holders of subordinate interests
in real property may record a request for a notice of
sale, requiring holders of superior interests in property
to give notice of an impending foreclosure sale.
- DEEDS OF TRUST
Under many deeds of trust forms, the trustee is usually
given a power of sale in case of default. Here there
is no court action because the trustee himself gives
public notice of the sale (this can be on a door of
the courthouse and/or by an advertisement in the paper).
He then holds a trustee sale and the property is sold
at public auction.
A trustee sale is fast and can usually be accomplished
in 80 to 120 days because trustees do not have to wait
for court action. The money the trustee obtains from
the sale wouldthen be applied to the principal of the
mortgage debt plus the accrued interest and legal costs
incidental to the sale. Any excess over and above what
is due any lienholder is returned to the defaulted borrower.
It is important to note that a foreclosure sale under
a deed of trust in default will cancel any tenancy of
the property, such as a lease that began after the deed
of trust was executed and recorded.
- MARKETING FORECLOSED PROPERTIES
- Before property is foreclosed be aware of the
sellers right of redemption.
- Find out who the foreclosing lender is and attempt
to work with them. A lender always prefers a sale
instead of a foreclosure. Often they may agree to
give you more time to sell the property.
- Sales of HUD and VA foreclosed properties:
All FHA guaranteed loans that have been foreclosed
are paid off by HUD (Department of Housing and Urban
Development) to the lenders. This is why the borrower
pays the mortgage insurance premium. HUD and VA
then sell the properties through various methods,
usually by use of licensed real estate brokers.
Although HUD sometimes advertises in the newspaper,
it usually simply lists its properties on a register
which is published to those brokers who sign up
and get registered to receive the lists.
The key to understanding the sale of HUD properties
for agents is that there is never any "cooperating
broker" with HUD properties. HUD has the "listing"
and therefore any agent that gets the sale is always
going to be the "selling broker".
The primary features to sell on HUD/VA properties
are price and terms. One of the last things to do
is to actually show the property which many times
is not in the best of shape. This market is usually
in the lower price range and buyers are in the lower
income bracket. However, this market is also very
ripe for the investor market and for buyers who
are always looking for "fixer uppers".
Many times HUD will offer special terms as an incentive
to sell their properties and the VA will sometimes
even finance the property themselves.
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