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What Are Bank Owned Homes?
Even in good times, bank foreclosure is a common occurrence. For those with good credit and cash on hand, opportunities for bank foreclosure investments are definitely out there, but you have to know what you are looking at.
How a Home Becomes a Bank Foreclosure
When a borrower takes out a mortgage loan from a bank, the loan is typically secured by the property being bought. Before the loan is final, terms are set to outline how monthly payments will be made to repay the loan. If the borrower/owner doesn't met this contractual obligation they are in default on the loan. At this point the property that was put up as collateral to secure the loan goes into foreclosure.
In other words, it will likely become a bank owned, or REO, property.
Bank foreclosure doesn't occur if a borrower is a few days late making a payment. How soon a bank can initiate a foreclosure after non-payment depends on what state the property is in. Typically, foreclosure is initiated after 90 days of delinquent payments.
When a home is in threat of foreclosure (after 1 or 2 missed payments), the bank will contact the mortgage holder by way of a 'breach of contract' letter warning them that they could soon go into foreclosure. If the borrower pays the amount owed in full, plus late fees, then the home is no longer in threat of default. The bank may also be open to adjusting the terms of repayment so that the borrower doesn't go delinquent again.
However, if no agreement can be reached and the borrower can't make the missed payments, the home will proceed into foreclosure and the lender will then begin the process of selling the home at a foreclosure auction. If the bank can't find a buyer at auction, the bank then takes control of the property and it officially becomes a bank owned home.
How Soon REO Homes Are Sold?
You might find it surprising, but banks aren't eager to put a home into foreclosure in most cases. That's because most banks are not in the property management business, instead they prefer to make money by lending money. If a borrower has defaulted on their mortgage payment, the lender's main concern is that the property provides a return on their investment.
The quicker a bank can sell a property the better the return is likely to be. Most REO properties are sold within 1month to 1 year of being legally foreclosed on. Again, this will vary from state to state due to laws regulating the sale of foreclosures.
However, buyers should be aware that most states allow for a redemption period in which the original owner can retake possession if they are able to find the funds to repurchase.
Quick Facts About REO Properties
- Bank owned properties are often sold to recoup the portion of the loan that wasn't paid, this translates into homes that are available below market value.
- Many bank foreclosures are fixer-uppers in need of repair. You'll be able to add value with improvements and possibly make more in profits if you resell the property.
- If it's bank owned, chances are that the property liens, or financial claims by others against the property, have been paid by the bank. This would clear the title, so the new owner won't inherit an old liability. However, it's extremely important that you verify the property is clear of all liens before you close.
- If a borrower defaults on a mortgage that's insured by the FHA the bank will not take possession of the home. In these cases the property becomes a HUD foreclosure.
- There is no standard way in which lending institutions handle their REO properties and laws also vary from state to state.
- The bank department in charge of selling REOs is often referred to as the loss mitigation department.
Use the HUDClips.org Foreclosure Listings section to quickly find foreclosures in your area.