How does foreclosure work or when are the times to buy a foreclosure?

I was at a seminar on Tuesday, and I saw a great flow diagram of how the foreclosure process works.. I’ll try and describe some of the process because it wouldn’t make sense if you just saw the diagram.

It’s important to realize that banks really don’t want properties. They want the money. It costs them a lot of time and money to foreclose on someone, and they really don’t want to do that. Also important to note that each bank has a loss mitigator(s) who generally is charged with handling about 300 short sales a month, and they pick and choose which ones they mitigate(because they get paid off those), so they narrow it down to about the 50 best, and only about 1 in 3 of those close each month. So you really need to have your package(offer, paperwork, etc) done right, or they just throw it away.

Here is the process as I understand it.

1) Seller can’t afford the payments on a home and become delinquent.

2) Bank starts foreclosure process.

3) Seller can catch up the payments, short sale the property, or be foreclosed upon. Note: Sometimes the bank will offer to create another loan(forebearance agreement), generally at a higher percentage rate and for a high origination fee, for the amount of delinquent payments plus other charges. So if you are 3k delinquent, they will create a new loan for 3k+(plus other delinquent fees, and want a high downpayment) and then have you start making payments on both the original loan and this new loan. Chances are if you couldn’t make the first payment, it won’t be long til you can’t make the two payments and are back to step one.

4) Buyers/Investors have a chance to get lender to agree to short sale, or can possibly buy the bank note(buy the loan in its’ current state). Important to note that PMI and FHA/VA Insured loans can be a major detractor in your ability to get a short sale closed. I heard an interview with a loss mitigator, where he stated that even if you are offering 100% of the homes value(not the original loan value, but the current value), the bank might have to decline your short sale, because PMI or FHA/VA has deemed that the appropriate action. Buying the note is an interesting idea, you buy the note at 50-80 cents on the dollar, maybe you can lower the interest rate and forgive some late fees, etc and keep the seller in the home making payments. you bought the loan for 50-80 cents on the dollar, and the seller is still paying on the loan at original value. After a year, if they have kept up on their payments you can sell the loan to another investor as a performing loan at closer to original value of loan or at a discount if you original loan purchase value was high enough.

5) Home is foreclosed upon and goes to Sheriffs Auction. Note: If bank buys the property back, they are basically paying themselves(minus sheriffs’ fees). This is where 2nd, 3rd, or other loans can get the shaft(in most cases). 1st mortgage gets paid first, etc. Important to note: Sheriff’s Auction is not the best place to buy homes. A) you are bidding against banks who are paying themselves off, and B)you are buying “As Is”, with no ability to say yes or no AFTER an inspection(you can usually get an inspection on pre and or post foreclosure. They may not repair anything, but you get an idea if you are getting in over your head, or not)..

6) If bank buys property back, they can sell home via REO(Real Estate Owned) Realtor, sell the home via their own in-house REO Realtor(rare), or if the home was insured for enough money, then they can just turn the home over to the PMI company/HUD/VA.

Side Note: For people who don’t think percentage rate on a loan drastically affects your monthly payment…

150k loan at 7% = $997 p/month payment
150k loan at 8% = $1100 p/month payment
150k loan at 9% = $1207 p/month payment

So if you get an ARM and it adjusts 1-2% a year you can see how quickly you can get in trouble. Google for a mortgage calculator if you want to plug in your own numbers.

As always, if you like what I write, and you or someone you know is looking to buy, sell, and or invest using a great realtor in central Indiana, or anyplace else for that matter. Please feel free to send me the persons name, email, address, and or phone number and I will be happy to help them, or refer them to someone else who can… In the process, I may earn a referral fee, if i cant help them myself!