Bank Foreclosures

Bank Foreclosures


Bank foreclosures are homes that have been repossessed by a lending bank as a result of a homeowner's default on their home mortgage loan. The bank takes control of the home to cover the cost of the unpaid loan.

What is a Bank Foreclosure?

Bank Owned Homes

There is no question that there have been major shifts and changes in the real estate industry in the last few years. As more and more homeowners have struggled to keep their heads above water, homes have slipped into foreclosure at an ever-increasing rate. This has left a big window of opportunity for individuals who want to create a business out of purchasing these foreclosed homes for great prices.

A bank foreclosure results from a homeowner who has stopped paying on their mortgage. This might be due to variety of reasons including health problems, job loss or divorce. Some people were put into adjustable rate mortgages at some point and then could not pay the increased payments when the interest rate adjusted upward. There are a myriad of different reasons as to why someone stops paying for their mortgage.

In the end, there is a process in each state that leads a home into actual foreclosure. Some states have a judicial process while others have a non-judicial system. Typically, a home will end up at a trustee sale or a foreclosure auction, giving buyers and investors an opportunity to bid on the property. Many times, the property does not sell at auction which means that they bank has to take it back into its own inventory. At this point, it becomes known as a bank foreclosure or an REO (real estate owned) property.

What About Financing for Bank Foreclosures?

Understanding the financing process is an important part of both buying and selling a property. Without a basic level of understanding, you could find yourself in a mess due to a simple lack of knowledge. Let's take a quick look a the different types of mortgages and loan terms:

Loan Types:

  • Conventional Fixed Rate: A conventional loan requires a higher down payment of at least 10%. The closing costs can vary from lender to lender. They are harder to qualify for than an FHA loan, especially if you have had credit issues such as bankruptcy.
  • FHA loans: These loans are insured by the federal government using mortgage insurance that is charged to the borrower each month. Down payment is lower at 3.5% and credit scores can be lower.
  • VA loans: These loans are only available to veterans who have served in the U.S. Military. No down payment is required, and the loan is guaranteed by the Department of Veteran Affairs. The loans are actually funded by a conventional lender, however.
  • Fannie Mae: This is a government sponsored entity that is chartered by Congress to assist in making mortgage affordable and stable in the U.S. Housing market. Fannie Mae operates in the secondary mortgage market meaning that they don't work directly with consumers, but with mortgage bankers and brokers. They make certain that lenders have the funds necessary to lend to buyers at affordable interest rates.
  • Freddie Mac: This is the short name for the Federal Home Loan Mortgage Corporation, which is also government sponsored. This group buys mortgages on the secondary market, combines them together in a pool and sells them off as mortgage back securities to investors.

There are also other types of loans that are not as commonly used such as interest only, adjustable rate, bridge loans, balloon notes and reverse mortgages.

Loan Terms:

  • Interest rate: This is the percentage that you pay your lender each month as a cost for borrowing the money. Interest rates fluctuate depending on many factors in the economy, but will "lock in" on most loans (with the exception of adjustable rate mortgages).
  • Discount points: Some people choose to "buy down" their loan by paying money up front. The more that you pay up front, the less your interest rate will be.
  • Origination fee: This is the fee that lenders and brokers (loan originators) will charge for handling the processing of the loan.
  • Principal: This is the actual amount you are borrowing for the purchase (not including taxes or insurance).
  • Taxes: These are the taxes that are assessed by your local government entity. Sometimes they are paid once or twice per year. Other borrowers have an escrow account set up to automatically pay these fees.
  • Homeowner's Insurance: This is normally referred to as hazard insurance and protects your home against damage from wind, fire and other hazards.
  • Mortgage Insurance: This insurance is different from hazard in that it protects the lender in the event that you do not repay the loan.

Choosing the Right Bank Foreclosure Home

Couple of seniors visiting a foreclosed home

When looking for a home, there are several factors to consider. First, you want to look at the location to make sure that it fits within your needs. Think about the proximity to your workplace, local schools and your house of worship, if you have one. Even if you love the subject property, you have to remember that you need to also be comfortable with your surroundings.

Next, look at the size of the home. Is it going to suit your needs now and in the future? For instance, are you planning to increase the size of your family? Will you have enough bedrooms and bathrooms? Do you need any special features in the home such as a basement, swimming pool or fence? Make a list of these things so that you don't leave anything out.

Always get an inspection done on a property that you are considering. Whether it is new or a resale, it is critical to know if there are any major issues in the property that need to be repaired or replaced. Hire an independent home inspector to check out all of the major components of the property such as electrical, plumbing and roofing. Because foreclosure properties are considered to be "distressed", they are typically sold as is. That means that your good deal could be consumed by massive repair costs if you don't know what you're getting yourself into. The only way to know for sure about the status of the home is to have a full inspection done. Also, the unfortunate truth is that many home sellers do damage to the property when they find out it's going to be foreclosed. Sometimes, they also did not have enough money to take care of general maintenance and repairs on the property.

It is also critical to make sure that the home has a thorough title search done to make certain that there are no clouds on the title. For instance, there could be a lien against the title or forgery that has occurred somewhere during the chain of title. Finding out about these issues very early into the process is critical. By searching the public records to look for clouds against the title, you can help to protect yourself. The last thing you want to have happen is to find out that your closing has been stalled because of these title issues.

Closing The Deal

Broker holding the keys of a foreclosure sold

Negotiating with the bank can be a little bit tricky until you understand the process. The first thing you have to understand is that lenders are not emotionally attached to the outcome of a contract like a seller would be. They are simply interested in the numbers associated with the deal. They want to make a certain bottom-line figure, and anything outside of that is not really of interest to them. This means that you shouldn't be afraid to ask for a reasonable price and terms.

Making an offer on a bank foreclosure may be done on the bank's own specific paperwork. For this reason, it is important that you thoroughly read the contract to make sure that you understand all of the stipulations noted. You may even want to have an attorney take a look at it if you're unfamiliar with the documents. As you make the offer, consider things such as sales price, closing costs, inspection rights and closing date. Even though the bank has a list price, it doesn't mean that you can't make a substantially lower offer if the property warrants that. For instance, if the property needs massive repairs then that should be reflected in the final price.

Once you have your contract executed, it is time to start making preparations for your financing, inspections and closing escrow. If you are working with a real estate agent, they will likely handle a lot of this process for you. Make sure the you understand the time limits outlined in the contract as far as how long you have to get an inspection and close on the property. Start working on your financing immediately so that you can meet all of the deadlines necessary in order to close on the deal.

FAQ about Bank Foreclosures

  • There are a number of different reasons why you would want to get involved in bank foreclosure investing, but whenever it is done properly, it can be an excellent business. As a matter of fact, finding American homes that are in foreclosure early is one of the best ways to make sure that any sale that takes place, takes place in your favor. It is not so much a matter of buying these homes as soon as they come up, but finding the home that is going to be sold at under market value. You can find this inventory at by searching on a regular basis.

  • Creating the optimal bid for a bank foreclosure – a home that has been foreclosed on by a bank because the previous owner defaulted on the mortgage loan – depends on a variety of factors. One of the most important factors is the list price provided by the bank at auction. How much is the bank asking for the home? Your bid should be based on a percentage of that amount. Another factor is the property itself. Is it in good condition? If not, how much in repairs would the home require in order to make it livable? This should be provided to you by a qualified home inspector in a formal estimate. Generally, the poorer the home, the lower the bid may be.

    Another factor is the area. What is the neighborhood like for the home? Is it in a prime location, or is the neighborhood full of low-value housing? Knowing what similar homes cost on the open market can give you a better, clearer picture of the best bid.

    In short, there are a variety of factors that must all be considered. Depending on the condition and location, you could see substantial discounts. Many foreclosures sell for 85-95% of the listing price at auction, namely because of competition between rival bidders. But, with the amount of foreclosures on the market, it is not uncommon for foreclosures to go to bidders who offer anywhere from 50 to 75% of the bid price. One popular strategy is to submit a low bid roughly 30% below the list price of a home and see what happens.

  • An investor or prospective occupant who is purchasing a bank foreclosure or a short sale may wonder what difference – if any – exists between the two when it comes to purchasing a home. There are two main differences between the two: one is associated with price; the other is associated with the condition of the home.

    Short sales are processed at the same time as foreclosures; in other words, lenders process both at the same time, which could mean the buyer has simpler, less complex path to ownership by pursuing foreclosures. The purchase price could also be lower with a short sale, because the bank usually marks up the foreclosure listing price to cover legal fees associated with foreclosure. But, you run the risk of paying more than you would during a foreclosure auction. Of course, buying a short sale ensures that you get the property - which is not a sure thing at auction.

    Short sales also tend to be in better condition than foreclosures because some homeowners rip out a home's furnishings and fixtures prior to vacating the premises out of spite or material gain. The bank then has to repair the damage and often chooses not to do so, resulting in repair bills for the new owner at auction.

    In reality, though, buyers find great deals with both short sales and bank foreclosures sold at auction.

  • A variety of entities routinely publish dates and times for bank foreclosure auctions for the general public. One way to find this information is to use a foreclosure listing service, which often has updated information so you can locate an auction. Another way is to check with the county courthouse. They routinely publish foreclosure auctions at least 20 days in advance. In fact, most jurisdictions have regular times and dates, such as the first Tuesday of every month, for their auctions. If there is a specific property you want to search for, you can check public records at the county recorder's office. Jurisdictions also publish public notices in the newspaper in advance.

  • If you want to obtain a bank-owned home that has already been through foreclosure, you can submit an offer to the bank through a real estate broker. (For homes that have not yet been sold at foreclosure, you can try a short sale or attempt to purchase the home at auction through bidding.)

    This process can take a bit of time, and it really depends on the situation. How long has the home been on the market? The longer it has been on the market, the sooner you will hear back from the bank. What is the home's condition? Is the home already severely discounted from fair market value? If the home is in a poor condition, you will hear back sooner rather than later because the bank will want to avoid having to pay for the repairs itself.

    How many other bank foreclosures and bank-owned homes must the bank deal with at the moment? If times are busy – and they frequently are – you may not hear back for weeks. Of course, during all of this remember that communication between a potential buyer and a bank is often fraught with delays, primarily because the bank is a collection of individuals instead of one point of contact who makes all the decisions. Also, a bank is free to ignore your offer, especially if it is too low or someone else has submitted a better offer.

    In the end, if you value the home and desire to own it, and are willing to wait a month, do so. But, if a bank has not replied to you within a month, most realtors recommend you look elsewhere.

  • Discovering ownership of a foreclosed home can be tricky without the right information. That kind of information is not readily displayed on the property premises, for starters. Plus, banks sometimes – for a variety of reasons – keep such information close to the vest.

    One way to find out which bank holds ownership of a foreclosed home is to go to the county office of deeds and records (or other variants) where property information is recorded. They will have the name of the lender that owns the property if it has been properly recorded (which, due to robo-signing, may not have been done).

    You can also consult with your realtor, who can do the legwork for you and find out which lender owns the property. Sometimes, the lender or company in question is not a local company; in that case, communication with it may be more difficult than it would normally be otherwise. Of course, if you find the property in MLS, you can see not only which lender owns the property but the listing price and time on market. And, finding out when a property will be placed on the market can be difficult and may require the services of a realtor (but not for finding the date of the auction; that information is usually readily available).

  • There are many reasons why people choose bank foreclosures. One of the main reasons people buy bank foreclosures rather than regular, non-foreclosed homes or new homes is price. Bank foreclosures can usually be purchased for less than an existing home and definitely less than a new home that is similar to the foreclosed property. This is because the foreclosure process naturally discounts the home due to the auction list price being based on the amount owed on the home - which can result in steep discounts from the fair market value.

    Another reason is because people may need the cheaper homes in order to qualify for financing. Some lenders may not give a certain individual enough money to cover the price of a traditional home, but may agree to finance the amount necessary for a cheaper foreclosed property.

    In the end, people buy bank foreclosures rather than regular homes because they offer the promise of significant discounts from the list price, resulting in sizable savings.

Go to the Foreclosures FAQ page

Banks Role in the Foreclosure Process

This video explains a bank's role in the foreclosure process, how property owners arrive at the point of foreclosure and how to deal with banks when in a foreclosure situation. We also highlight the opportunities presented to investors through...

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