What is Foreclosure?

    As a homeowner, foreclosure is a scary concept. The idea of getting your house sold from under your feet if you don’t pay your mortgage is enough to keep you up at night. The best way to avoid it is to simply pay every month. However, many people don’t know exactly what foreclosure is or what the process looks like. This article will answer three of the common questions about foreclosure.

    What is Foreclosure?

    Foreclosure is the legal process where a lender attempts to recover the outstanding balance on a borrower’s loan who has stopped making payments to the lender. The lender forces the sale of the property and the proceeds of which will pay back the loan to the bank and pay for legal fees. At this point, the bank will own the house. The bank will usually auction the house with a price starting at the remaining mortgage balance.

    Should I buy a house in foreclosure?

    The short answer is: It depends.

    Buying a foreclosed house seems like a slam dunk. You get a house for a great deal that you could fix up and flip for a pretty good profit; or its a cheaper place to live in a potentially nicer neighborhood. However, you most likely will not be able to see inside the house until after you buy it. If the house has a lot of damage, has mold or structural damage, or needs garbage removed, you may find yourself at a financial loss to completely fix the problems and make the house livable or sellable. One other pitfall is negative equity. For example, a foreclosed house is auctioned off for $600,000 but may actually be worth $275,000, leaving you with -$325,000 in equity. If you are considering buying a house in foreclosure, take your time and do your homework before buying it. Depending on who you know or the circumstances of the foreclosure, there is a chance you could view the house or property to learn about it before you bid.

    What do I do if my house is being foreclosed?

    **Full disclosure: this is not official legal advice, only information that is publicly available. If you are seeking to contest a foreclosure, contact a legal professional.**

    If your house is being foreclosed, you are able to contest it. It’s an uphill battle, but you have ways to fight it. As the debtor, you may be able to petition the court for an injunction to keep your right of redemption. Right of redemption is the agreement between the lender and the buyer of a property when the property is sold that the lender will hand over ownership of the house when the debt (mortgage) is paid in full. Depending on the state you live in, you may be able to challenge the foreclosure in other ways through the courts. These have proven difficult because they usually involve paying the rest of the outstanding debt before auction to prevent foreclosure.

    In the wake of the housing crisis in the late 2000’s, the U.S. Treasury helped implement policies that could allow debtors to renegotiate the terms of the mortgage loans instead of foreclosure. Before and during the housing crisis, lenders were unwilling to renegotiate the mortgages. These negotiations may include lowering the principal payment or temporarily reducing the interest rate. In addition, the federal HARP program may be able to help borrowers refinance their mortgages. Ask your legal professional if these options are feasible.

    Up next: How much house can I afford to buy?

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