3 Stages of Foreclosure

First things first!  To understand foreclosures, you must know the three stages that

House keys and foreclosure notice

real estate can be in during foreclosure.

There are lots of things a bargain property is called….pre-foreclosure, auction, bank owned, distressed, short sale, foreclosure, REO…..you get the picture.

To understand foreclosures, you have to know the three stages:

  1. Pre-foreclosure Stage.  This is the very start of homeowners missing payments.  It can be to a first or even a second mortgage to the house.  After the third or fourth (sometimes more) missed payment, the lender sends the homeowner a Notice of Default letter and it goes in to Public Record.  The homeowner then will have an allotted amount of days to respond and come up with the missed payments as well as fees.  The homeowner can sell the property during this time frame.  If the owner owes more on the home than what the home is capable of bringing on the market, and the owner cannot make up the difference, they do what is called a Short Sale.  This allows the sale of the home, and the lender takes less than what it would take to satisfy the payoff amount.  Lenders may or may not come back after the owner for the difference.
  2. Foreclosure Stage. If the home sells at auction (You may have heard of a Trustee’s Sale, Sheriff’s Sale or Step Sale), the proceeds from the sale go to pay off all mortgages against the property, taxes, liens, service charges and fees as well as any liens recorded against the home.  If there are funds left over afterwards, the remaining funds will go back to the homeowner.  The lender might also come after the homeowner with a deficiency judgment.
  3. Post–foreclosure Stage. If a property does not sell at the auction, either because the property didn’t receive the lender’s minimum bid or because no one bid at all, then the property becomes what is known as Real Estate Owned (REO) by the lender or the government (FHA/VA).  Once a property is owned by a lender, it is placed for sale normally with a real estate agent and placed in the MLS.  It then becomes a foreclosed property.

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