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What are foreclosures?

For some people, foreclosure is a financial disaster. For others, it's a easy route to cheap property. But what exactly are foreclosures and what are the essential things that homeowners and home-buyers need to know?


In simple terms, foreclosure is the legal process by which property is repossessed and sold at auction to cover the costs of an unpaid debt. This is usually the result of a homeowner defaulting on mortgage or loan repayments. The most common causes of foreclosure are divorce, loss of employment or a death in the family. Every year, around one million homes across the US are sold as foreclosures by banks and private mortgage institutions.

Some government departments can also repossess property to cover the costs of outstanding taxes and other debts. Large numbers of homes are repossessed and sold on every year by the US Department of Housing and Development (HUD), the Internal Revenue Service (IRS), the Department of Veterans Affairs (VA) and US Customs.

For those unlucky enough to default on their mortgage repayments, foreclosure can be a drawn out and traumatic affair. Once a loan secured on a property goes into default for more than three months, the lender can start the ball rolling for the property to be sold to recover the outstanding debt. This typically takes 12 to 18 months from the date when the notice of default was filed.

As well as costing people their homes, foreclosure can have a devastating effect on personal credit. People who have lost property as a result of foreclosure will struggle to obtain loans or mortgages and may even fail simple credit-checks for home rental agreements - all in all, a very bad situation to be in. Most financial advisors advise homeowners to do everything within their power to avoid going into foreclosure.

Conversely, foreclosures can provide lucrative investment opportunities for home-buyers and investors. Houses auctioned as a result of foreclosures often sell for well below the market rate and savvy investors can pick up a bargain. However, full payment is required up front and property is sold 'as is', with no guarantees or insurance.

Predictably, there are plenty of pitfalls for unwary investors. Buyers should carry out a thorough inspection to assess the cost of repairs and ensure that no additional debts come with the title deeds. The following sections have more information on avoiding foreclosures and buying foreclosure properties.