Foreclosures occur when a property is repossessed due to the homeowner’s failure to pay off its mortgage. In the case of a judiciary foreclosure, it is a civil lawsuit filed by a lending agency, such as a bank or mortgage company. Upon failure to pay the outstanding dues within a certain time frame, the homeowner loses his rights to the property.
Foreclosures arise out of a number of reasons. Typically, the homeowner finds himself in a financial pinch due to losing a job, incurring debt, falling ill, death in the family, divorce or separation, or living beyond his means.
In other cases, the foreclosure is caused by the type of mortgage in place. A subprime mortgage, for instance, is a loan granted to homebuyers who don’t qualify for the standard (and also more secure) type of mortgage because of their low credit ratings. In these types of setup, the lender would often charge higher interest rates to mitigate the risk of taking on individuals with deficient credit scores.
Adjustable Rate Mortgages or ARMs are the most common form of subprime mortgages. ARMs provide an interest rate that resets on specific dates listed in the contract. Upon this reset, the interest rate is adjusted based on the real estate economy. Homeowners with low credit history may find themselves unable to adapt to increased rates, thereby falling short of their mortgage dues.
Some foreclosures, meanwhile, are due to the homeowner electing to forfeit the property. It’s a common occurrence when the outstanding mortgage becomes worth more than the property itself, often due to the neighborhood’s decrease in market value.
Once foreclosed, properties are repossessed by the lender and auctioned, or sold off, at discounted costs. As such, they provide more affordable real estate for investors and homebuyers. With the right resources, research, and market strategy, foreclosed properties can be turned into a viable asset.