What is The Difference Between Preforeclosure and Foreclosure?
Tuesday, November 18th, 2008
Well – to understand this clearly, the basics first. Foreclosure is the process involved in home buying with financing by a mortgage loan. Banks and other mortgage lending institutions extend home loans to the barrowers, after scrutinizing the personal particulars of the barrower such as the financial status, income potential, credit history and importantly the repaying capacity of the home loan. A legal contract (mortgage deed) is made out between the mortgage lender and the borrower, before actually handing over the money of the home loan.
It consists of all the terms and conditions of repayment of the home loan. Generally home loans are offered on 15 to 30 years of repayment period, with principal and interest specified to be repaid by monthly repayment installments. The mortgage lender has to get back the home loan with interest thereon in full during this period. So as a safeguard, the lender reserves the right to seize and sell the said housing property, in case of default in repayment of monthly installments. In such an eventuality, the lender forecloses the mortgage loan and initiates action to confiscate the said property and sell off the same by public auction. This procedure is called “Foreclosure” process.
The foreclosure process is governed by the Foreclosure Laws enacted by every State of the U.S. country. Accordingly the foreclosure process varies as Judicial Foreclosure and Non-judicial Foreclosure. In Judicial Foreclosure process, the lender has to file a law suit against the barrower, before a Court of Law and obtain a Court Order to dispose off the property by Foreclosure Auction.
The Foreclosure Law stipulates the procedures for issuing a Notice of Default by the lender to the borrower; giving sufficient time to the borrower to respond to the notice; conducting of a trial before the Court to prove the financial transactions of home loan and the default by the barrower through documentary evidence and finally fixing up a date for public auction of the said property in the Court premises. As can be seen, this is a long drawn process consuming a lot of time.
The Non-judicial foreclosure process is simple and fast in that by inserting a clause in the mortgage deed, the lender can quicken the process of seizing and selling off the property. A third party sale known as “Trustee Sale” of the property is also public auction to sell the property to the highest bidder, but the “Trustee” conducting the sale will be an individual or institution already specified in the mortgage deed. The Notice of default is registered at the County Recorder’s Office of the county, where the property is located.
The entire Foreclosure process takes place in three stages. From the date of Notice of Default to the date of actual foreclosure public auction, the property is said to be lying under pre-foreclosure period. The second stage is the actual foreclosure by public auction of the property, when any one can bid for buying. The third stage is post-foreclosure - if the property is not bid for the minimum price and so taken re-possession by the lender initiating the foreclosure process.
From the buyer’s angle for home buying from foreclosure property listings, they can save sizeable money on the sale price of these distressed properties. Of all the three stages, pre-foreclosure offers an edge for good bargain directly negotiating with the distressed home owner of the said property. Until such time the property is sold off by public auction, the ownership rests with the home owner. Therefore the distressed home owner will be too willing to short-sell the property to the buyer, with a very good discount, as the foreclosure will put a black mark in their credit history and by selling of the property directly, the pain of foreclosure is totally avoided.
