Step 1: Pre-Foreclosure
Property owners who are late in their mortgage payments will receive a Notice of Default from
their lender. Notices of default are filed with the local records authority. A Lis Pendens filing may
also be filed to notify any other lien holders. The Notice of Default provides instructions to the
homeowner on the amount they are required to pay and how much time they have to pay. If the
homeowner pays according to these instructions, the foreclosure process is ended.
Learn how to buy pre-foreclosures
Step 2: Auction
If the loan is not reinstated by the end of the pre-foreclosure period, the property will be sold 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 the lender a way to quickly liquidate the property. The lender typically sets a minimum bid at foreclosure auction equal to the amount owed on the property
plus fees and various costs to the lender.
Learn how to buy foreclosure auctions
Step 3: Bank Owned (REO)
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.
Learn how to buy bank owned homes
Exits from the Foreclosure Process
Properties may exit the foreclosure process in several ways. Pre-foreclosures may exit the process prior to the Foreclosure Auction in one of several ways:
a) Owner catches up on missed mortgage payments
b) Owner gets a loan modification to reduce their mortgage payments
c) Owner sells the property for less than what is owed on the loan (short sale)
d) Deed in lieu of foreclosure
Properties scheduled for a public foreclosure auction exit the foreclosure process by being sold to a third party buyer at auction.
Investors seek returns in several ways: buying cheap and flipping, making improvements, or renting for longer term appreciation. Investors may buy homes directly from homeowners, at auction, or from lenders.
Properties in the foreclosure process must ultimately be bought or rented by ordinary consumers who plan to live in them. This may seem obvious, but the consumer is an extremely important piece of the foreclosure puzzle. Consumers may pay significantly more or nearly nothing for a property based on a myriad of consumer preferences. Consumers may prefer to live near good schools or universities, away from high crime areas, away from hazardous waste sites, etc.
Judicial vs. Non-Judicial Foreclosure Process
In certain status, the foreclosure process no longer requires involvement of the court system. These states are referred to as “non-judicial”. See a comparison of foreclosure laws by state at Foreclosure Laws.