Buying a Foreclosed Home
Buying a foreclosed home often provides an excellent opportunity to buy a home below market value. When a home owner gets behind on their mortgage three months or more the lender generally will start a foreclosure action. The mortgage documents state that if the borrower (the home owner) can't pay their mortgage the lender (bank) can foreclose on the property and sell the home so the mortgage can be paid back. The bank will force a sale of the property and if no one bids more than what is owed, the bank will take title and then turn around and resell the property and use the proceeds to pay off as much of the loan as possible. If the sale proceeds aren't sufficient to pay off the mortgage it is possible for the bank to obtain a "deficiency" judgment against the borrower for the difference. It is generally wiser for an owner facing foreclosure to consider a short sale or "deed-in-lieu-of" foreclosure rather than an actual foreclosure. There may be income tax consequences for the borrower as well if the deficiency is forgiven. It may be treated as taxable income. For a discussion on the income tax aspects of debt cancellation visit the IRS website, "Home foreclosure and Debt Cancellation". Foreclosures currently are much higher than normal due to the poor economy that the US is facing. People have lost their jobs as companies have cut back in an effort to save money. Unemployment is over 10% as I write this. This is creating a much larger then normal supply of homes available for people buying a foreclosed home. As noted in the section, "Foreclosures", a home in foreclosure can be purchased prior to the actual sale (pre-foreclosure) or at the time of the actual sale ("on the court house steps") or after the lender takes title (Bank REO - "real estate owned"). As noted in the section, "Short Sale", sometimes when buying a "pre-foreclosure" the purchase price you are willing to pay as well as the market price are "short" (below the balance due on the mortgage) and require the bank to take less than what is owed in order to satisfy the existing loan. The section, "REO", discusses more detail about what happens once a bank has "bought back" a property after a foreclosure has been completed. Another excellent way to purchase a home is through HUD, the US Department of Housing and Urban Development. This is discussed in more detail in the section, "HUD Homes".
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