The Mortgage Foreclosure Process

Undertanding Foreclosures

Understanding the mortgage foreclosure process can help you if you are trying to buy investment properties in a pre foreclosure sale or just trying to save your property. If you sell your property with seller financing you should also understand the difficulty you may face to get your property back.

Many States are also imposing laws to limit the ability to foreclose on a property due to the 2008-2009 housing crisis. Some States also have a "right of redemption" law that allows homeowners or junior lien holders to recover their property up to one year after foreclosure takes place.

There are many variations of foreclosure law and each State is different, but you should know these two to help in understanding foreclosures:

• Judicial Foreclosures


• Power of Sale Foreclosures

Once a payment is over 15 days late banks start adding charges to your payment due. Somewhere between 60 and 90 days after you miss your payment, a lender will send you a "Notice of Default" and give you the opportunity to reinstate your mortgage. This is the start of the mortgage foreclosure process. If you fail to do that the mortgage holder will then file either a "lis pendens" (A law suit) in a Judicial Foreclosure State or a "Substitution of Trustee Notice" in a Power of Sale State. By this time there are significant legal fees that have been attached to the interest, taxes, and principal amount due.

Typically, a homeowner can try to contact the bank and workout a solution to reinstate the loan. Sometimes, if there is equity in the property it can be refinanced (with all of the increased fees and charges, making the payment even higher). But if there is no equity in the property, there is little that can be done to save the property.

ASIDE: I tried to buy a property from a homeowner that really was able to game the mortgage foreclosure process. NY is a Judicial Foreclosure State. After not paying the mortgage for 3 months a lis pendens was filed against the homeowner. He hired a legal firm and paid $1800 to "work out" a solution. The first lis pendens was dismissed. The homeowner continued to not make payments, so 90 days later a second lis pendens was filed. In the end the homeowner lived in a $250,000 house for 18 months for $100/month.

After the "lis pendens is filed or "Substitution of Trustee Notice" the homeowner is given 30 to 90 days to pay all late fees and reinstate the mortgage. For example, in a Judicial Foreclosure State a hearing date is set 90 days out. Legal maneuvers can be made to delay that or at the hearing delay the public sale. If the homeowner fails to reinstate the loan a "Notice of Public Sale" will be ordered by the Court. The lending institution will then have to publish publice notices for the auction of the property.

The Foreclosure Trustee Sale usually happens on the steps of the County Courthouse. At the foreclosure auction the first lien holder will often set the minimum bid. This bid will include the mortgage, legal fees, and taxes that are due. If there are no bids by anyone else, the property will be purchased by the attorney for the first lien holder and becomes REO (real estate owned) property of the bank.

The mortgage foreclosure process doesn't end there. As mentioned above, some States have a right of redemption law. This gives the homeowner or junior liens anywhere from 30 days to 1 year to "redeem" the property and get it back. If you buy a property in a right of redemption state and make improvements to it, you could lose your investment if the original homeowner redeems the property. If there is no right of redemption, all junior liens are wiped out at the auction.

Understanding foreclosures will help you if you are purchasing investment property or trying to hold on to your home. In can also help you make a mistake buying foreclosures in a right of redemption State.

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