Understanding Foreclosure

When the real estate market is booming and investment opportunities are optimal, many potential buyers will go to extremes to get into the market. Potential buyers looking to make a profit will invest in rental properties, vacation homes, or even trade up to a more expensive home. In some of these cases, the buyer might be required to accept a higher interest rate or even a second or third mortgage. These buyers are usually anticipating that property prices will continue to rise while interest rates decline. This is a definite gamble. Neither situation may occur, leaving the borrower with a large balloon payment coming due. If the balloon payment cannot be met, foreclosure is eminent. Unfortunately this is a sad reality for many buyers. Understanding the risks before making these major financial decisions is pertinent.

Make Alternative Payment Arrangements to Avoid Foreclosure

As a general rule, when dealing with foreclosure, remember that your lender would rather receive payments than foreclose on a property. Lenders are not interested in selling real estate and will often work with you, the buyer, as necessary to avoid a foreclosure. If you are facing a foreclosure, contact your lender before your payment problems arise and your lender may be able to offer an alternative payment plan to suit your new financial situation.

If you fail to make alternative arrangements with your lender and you miss a payment, your lender may begin foreclosure proceedings. In this situation, your lender will request that a trustee (often a title company) file a notice of default and notify you by mail. If the conditions of the default are not met, your lender may instruct the trustee to sell the property at a public sale in order to meet the payment.

Public Sale of a Foreclosed Property

In the case of a public sale, a notice must be published in a local newspaper and posted in a public place for three consecutive weeks. Once the notice of sale is recorded, the property owner who is facing the foreclosure has up until five days prior to the published sale date to make the required payment which will make the loan current. If the property owner makes the loan current and is no longer in default, the deed of trust is reinstated and the property owner can resume making regular monthly mortgage payments as per the original loan agreement.

If making the loan current is not an option, the property owner may still be able to work out a postponement of sale agreement with the lender. However, if no postponement agreement is reached, the lender may move forward with the property sale. New buyers bidding on the property at the sale must pay the amount of their bid in cash, cheque, or other acceptable method of payment, as specified by the trustee. The lender may "credit bid" up to the amount of the obligation owed by the original owner to ensure payment is received.

Buyer Beware When Purchasing a Foreclosed Property

Caution should also be exercised if you are a buyer who is interested in purchasing a foreclosed property. Keep in mind that foreclosed properties exist due to poor financial situations and may be burdened with overdue taxes, liens, or unclear titles of ownership. As a buyer, do your homework and get all the information concerning the potential property you are interested in purchasing. You can ask the title company for information on any outstanding issues concerning a foreclosed property.