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What is home foreclosure? Here are the basics

Foreclosure is a legal process by which a creditor — a bank, credit union, mortgage company, etc. — takes over a homeowner's property to satisfy a debt.

Foreclosure occurs when the owner of the property fails to make payments on the mortgage per the contract that exists between the owner and the creditor. As a result of the foreclosure, the owner loses the right to the property.

Foreclosure can also occur due to nonpayment of a second mortgage or even a home equity loan, as well as nonpayment of property taxes.

First-timers and foreclosures

It is advised by many that first-time homebuyers steer clear of buying foreclosures.

Those without experience may be shocked to find their newly bought property tangled in various legal issues (liens, judgments, etc.), in a state of disrepair, plagued by vandals, in a neighborhood of declining home values, and needing thousands of dollars in improvements that may not have been obvious earlier.

If you do decide to proceed as a first-timer, educate yourself on the risks first, and make sure your financial situation is solid.

Three stages

After the late payment stage, there are three stages of foreclosure:

  • The first stage is pre-foreclosure, when the owner receives a notice of default from the lender giving the owner a certain period of time to either sell the house or get payments up to date (mortgage payments and fees). Notices of default are public records and are therefore accessible directly or through various media, such as newspapers, and the local public records office. Pre-foreclosure typically sets in at 90 days.

  • The second stage is the public sale of the property, typically an auction, where bids on the home are accepted.

  • The third stage occurs only if stage two was not successful. In this stage, the lender takes title to the house and tries to sell it itself. Properties of this nature are called "real estate owned" properties, or REOs.

You can buy a home at any of these three stages. Each stage has its own issues and its own strategies for buyers to consider.

Dive Deeper: Buying a foreclosed home: The full breakdown

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

Read more information and tips our Buying/Selling a home section

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