What Is a Foreclosure Property?

Unhappy couple at a kitchen counter with a tablet, calculator, and bills
•••

Big Stock Photo / Getty Images

DEFINITION
Foreclosure is the process of a lender seizing and selling a property to a new buyer when borrowers fail to make their mortgage payments as agreed. It enables the lender to recover at least some of the remaining mortgage balance.

Foreclosure is the process of a lender seizing and selling a property when the owner fails to make mortgage payments as agreed. The sale enables the lender to recover at least some of the mortgage balance that remains.

The timeline and legal process for foreclosure can vary from state to state, but the end result is the same: The mortgage borrower loses their home, and the mortgage lender sells it. You might get a bargain if you buy a foreclosure property, but there are both pros and cons involved.

Definition and Example of a Foreclosure

A mortgage forms a lien against a property. It gives a lender the legal right to take ownership if the borrower defaults. The lender will then almost always sell the property to recoup its losses after it's taken control of the home. This process is called "foreclosure."

Investors and other buyers can then purchase these homes, often at auctions or directly from the bank or government agency that owns them.

How Does Foreclosure Work?

Foreclosures are likely to occur when the homeowner has failed to make agreed-upon payments on the mortgage, but the reasons behind nonpayment can vary. Sometimes, job or income loss is the culprit. Medical bills or credit card debt might make it impossible for the homeowner to stay afloat. Foreclosure can also be the result of bankruptcy, divorce, or disability.

Why Sellers Go Into Foreclosure
The Balance

In some states, there must be a court proceeding before the home can be taken. Other states offer options that don't require a court to get involved.

A lender can't legally foreclose on a home until the homeowner is at least 120 days behind on their mortgage payments.

Pros and Cons of Buying a Foreclosed Property

Pros
  • May be priced lower than other homes on the market.

  • Buyer may be able to buy a nicer or larger home than they could otherwise afford.

Cons
  • Homes often in disrepair, and sellers often won't, or can't, make repairs.

  • Previous owner might be able to take the home back in some cases.

  • The purchase process can be slow.

Pros Explained

  • May be priced lower than other homes on the market: Many buyers who consider buying a foreclosed property do so to save money. Not all bank-owned and foreclosed homes are a bargain, but many are priced at less than market value due to their state of disrepair. They also might be priced to sell quickly because of the lender’s need to recoup its losses.
  • Buyer may be able to buy a nicer or larger home than they could otherwise afford: Buying a foreclosed home can help you to buy a property that would otherwise be out of your price range. Perhaps the house is in a high-demand area, or maybe it has more square footage than your budget would otherwse allow.

The U.S. Department of Housing and Urban Development (HUD) even has some homes listed at $1.

Cons Explained

  • Homes often in disrepair: Foreclosed homes are often in poor shape. Many will need repairs that the seller doesn't want to, or can't afford to, make. Most foreclosed homes are sold as is. Most foreclosure auctions require cash in order to buy, so you might not be able to finance the purchase via a normal mortgage loan. A traditional home sale lets you include a home inspection clause and to negotiate on repairs and pricing based on the report's findings, but these sorts of requests and deals aren't allowed when you're buying a foreclosed home at auction.
  • Previous owner might be able to take the home back in some cases: Many states have what's called “right of redemption” time frames. They allow the owner a period of time to catch up on payments and take back their home. The previous homeowner might "squat" in the home, staying even after it's sold. It could be hard to remove them and could even require legal proceedings. The prior homeowner isn't involved with the sale, so it can be tough to know what repairs have been made to the house before you move in. Banks don’t have records of this type of upkeep.
  • The purchase process could be slow: You’re typically buying from a large bank or a private lender when you buy a foreclosure, so offers usually require more than one approval. It also might take longer to move the sale along. You can expect negotiations to be slower and more difficult than they would be with a traditional seller. Banks are looking to recoup as much of their losses as they can, so they'll likely present counteroffers during the talks. Your own counteroffer must be approved by many people.

Key Takeaways

  • Foreclosures occur when the owner of a home stops paying their mortgage and falls more than 120 days behind on the loan.
  • Banks and government agencies claim these homes and then sell them to try to recoup their money, often to the highest bidder.
  • You can buy foreclosed homes at auction or straight from the bank or agency.
  • It’s often harder to deal with a foreclosure purchase when big banks are involved, but you'll probably pay less.

Article Sources

  1. Consumer Financial Protection Bureau. "How Does Foreclosure Work?"

  2. Consumer Financial Protection Bureau. "I Can’t Make My Mortgage Payments. How Long Will It Take Before I’ll Face Foreclosure?"

  3. Homebuying Institute. "How to Buy a Foreclosure Home."

  4. U.S. Department of Housing and Urban Development. "Dollar Homes."

  5. Wells Fargo. "Buying a Foreclosure."