Frequently Asked Questions about Foreclosure?

What is a Foreclosure? Foreclosure vs. Short Sale
What is a Pre-foreclosures (NOD, LIS)? What is an Auction (NTS, NFS)?
How to Avoid Foreclosure? Before you buy…
What is a Foreclosure?
Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default. The foreclosure process can end one of four ways:

  1. The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.
  2. The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
  3. A third party buys the property at a public auction at the end of the pre-foreclosure period.
  4. The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction. These are also known as bank-owned or REO Properties (Real Estate Owned by the lender).

Nevada foreclosures are primarily accomplished out of court. An out-of-court foreclosure in Nevada can be completed in about four months.

This process allows for three opportunities for finding bargains on foreclosure homes.
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Forclosure vs. Short Sale 
Short sale or pre-foreclosure sale involves the sale of a home wherein the lender agrees to accept less than the amount owed on the mortgage. Short sales happen when there is not enough equity to sell and pay off the mortgage debt. Moreover, if the home is located in an area where home prices are on decline, then it may be sold off for less at a price that isn’t enough to cover the loan balance.

A short sale is far less damaging than a foreclosure or a deed-in-lieu. The FICO score is likely to drop down by 75-100 points if you do a short sale as compared to 250 points if you’re on a deed-in-lieu or foreclosure. Often, lenders allow for a short sale if they believe that they will suffer a smaller financial loss compared to that of going through the foreclosure process.

By doing a short sale, the borrower can avoid having a foreclosure on his credit report thereby preventing further drop-down on the credit score. Moreover, a short sale is faster and less expensive compared to foreclosure.

 

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Issue Foreclosure Successful Short Sale
Future FHA Loan – Primary Residence A homeowner whose home goes into foreclosure will not qualify for an FHA home loan for 5 years. A homeowner whose home is sold in a short sale will qualify for an FHA loan after only 2 years.
Future FHA Loan –
Non-Primary Residence		 An investor whose property goes into Foreclosure will not qualify for an FHA loan for 7 years. An investor whose property is sold in a short sale will qualify for an FHA loan after only 2 years.
Future Loan by Any Mortgage Company On any future mortgage application, a buyer must answer YES to the question “Have you had a property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” This will have an affect on future interest rates. There is no question about whether the buyer has ever done a short sale on mortgage applications.
Credit Score The homeowner’s credit score can be lowered between 250-300 points as a result of a foreclosure. Generally this decrease will last more than 3 years. Only late payments on the homeowner’s mortgage will show up on a credit report. After a short sale the mortgage should be shown as ‘Paid’ or ‘Negotiated’. This will only lower the credit score about 50 points, as long as all other payments are made on time. The effect of the Short Sale on the credit score can be as short as 12-18 months.
Credit History A foreclosure can stay on a homeowner’s credit history for 10 years or longer. There is no specified term to report a short sale on the homeowner’s credit history. The mortgage status is frequently reported as ‘Paid in full, settled’.
Security Clearances It can be extremely difficult for an individual to get security clearance approval when applying for such jobs as police officer, military, CIA, Security. Having a foreclosure may affect job status. A short sale, on its own merits, may not challenge most security clearances.
Current Employment Employers can and do check credit status of employees in sensitive positions. A foreclosure can adversely affect job security. A short sale is generally not reported n a credit report and should not pose a challenge to employment.
Deficiency Judgment Depending on the type of loan at the time of foreclosure, some banks can go after more money from the homeowner to pay more of the mortgage deficit in a ‘deficiency judgment’. Depending on the type of loan at the time of short sale, the bank may try to get more money from the homeowner, but many times it is possible to negotiate no promissory note or deficiency judgment.
Deficiency Judgment (amount) Once a property is foreclosed, the bank will try to sell it through a Realtor or in an auction. If the sale price is lower than the mortgage due, the bank will try to get a higher deficiency judgment from the homeowner. In a professionally negotiated short sale, the sale price should be close to actual market value. The proceeds to the bank would therefore result in a lower deficiency for the homeowner

 

What is a Pre-foreclosures (NOD, LIS)? 

  • Pre-foreclosures by definition exist when a homeowner gets behind on their payments and is notified by their bank they are in default – this is much different from a Las Vegas Foreclosure.
  • Pre-foreclosures are complex real estate transactions and require a great deal of work but can generate a sizeable return if done properly.

Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property outright. The borrower/homeowner will end up with something to show for any equity in the property and avoid a bad mark on his or her credit history, which is advantageous.

  • A pre-foreclosure is essentially a grace period that allows the homeowner to address or cure the default within a period of time that is defined by the mortgage contract with the bank.
  • The length of time for a pre-foreclosure can vary but it is typically 60—90 days in the state of Nevada as a general rule.
  • If there is sufficient equity in the property there is the potential to generate a profit as an investor and for all parties (homeowner, bank and investor) to work out a deal.
  • You are actually buying the equity in the property, working out an arrangement with the homeowner and the lender; then selling the property to generate a return.
  • You need to research the title and condition of the property and can realize discounts of 20-40 percent below market value on average.

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What is an Auction (NTS, NFS)? 

If the loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction often offers some of the best bargains and avoids the unpredictability of dealing directly with the borrower/owner.

A trustee (third party named in the deed of trust) carries out the public sale. A notice of sale is posted at least 20 days before the trustee sale date in three public places and published in a local newspaper once a week for three weeks. The notice of sale is also mailed to the affected parties.

The sale may be at the trustee’s office, and anyone may bid. Except for the lender, the winning bidder has to pay the full bid amount in cash or cashier’s check to the trustee. If the sale is postponed, a public announcement is made at the time and place of the sale. After the sale, the trustee transfers ownership to the winning bidder.

An out-of-court foreclosure provides the winning bidder with clear title, and there is no redemption period for the borrower after an out-of-court foreclosure sale. Although court foreclosures are uncommon in Nevada, there is a one-year redemption period for this type of foreclosure.
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How to Avoid Foreclosure? 

Pay your past due balance and begin making your full monthly payment

  • Modify your mortgage with the bank and agree to a repayment plan you can afford
  • Borrow money from friends, family or your church to pay your past due balance
  • Refinance your mortgage with another lender at a lower interest rate with more affordable payments
  • File bankruptcy to put your creditors on a repayment plan you can afford right now
  • Work with a realtor to complete a short sale to have your current mortgage satisfied and released
Before you buy… 

You’ll need to make sure you’re armed with the foreclosure data you’ll need to find and buy foreclosure homes.
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