Foreclosure can be a viable option as an exit strategy for a non-performing note. The foreclosure process timeline may vary state by state.
However, on a high-level overview, the process is similar. The foreclosure on a piece of real estate by the note owner (lender) cannot occur until the borrower (homeowner) has fallen at least three months behind in their mortgage payments.
Once a borrower has fallen three months behind in mortgage payments, the lender will send out a notice of default. The notice of default will be sent out by the loan servicer, or the lender can hire an attorney to send it out.
The Notice of Default
The notice of default letter informs the borrower that if they do not get caught up in payments, the foreclosure process will begin.
Once the notice of default has been filed, there is a duration of time which the lender must provide the borrower to get caught up. This is referred to as the reinstatement period. The reinstatement period may vary by state.
The Reinstatement Period
For example, in California, the reinstatement period is four months. In the state of Texas, the reinstatement period is only a few weeks.
After the reinstatement period has ended, the next step in the process is to have an auction at the county sheriff’s office.
In most counties, the county sheriff will hold an auction to sell the real estate so they can raise the money for the sale to give to the note owner (lender).
The Bidding Process
Prior to the sale occurring, the foreclosure must be advertised. When investors see this, they may go visit the property and decide if they would like to place a bid. The opening bid will be an amount set by the note owner (lender).
Regardless of how high the bidding goes, the note owner is not entitled to more money than they are owed. Any excess amount will go to the either the holder of the second mortgage on the property or the homeowner who was foreclosed on.
The Eviction Process
In most cases, the property will not sell at auction. When this occurs, the sheriff will provide the note owner the sheriff’s deed. They will record the sheriff’s deed in the county, and then they will receive the title to the real estate, thus making them the new owner of the property.
They may call up a local real estate agent to change the locks if the property is vacant. If the property is occupied, they, as the new property owner should call an eviction attorney prior to calling a real estate agent.
The lender can also approach the homeowner who was foreclosed and remind them that they no longer own the property and show them the sheriff’s deed proving that the lender is now the rightful owner, and they must vacate the premises.
The defaulted borrower may voluntarily move, or they may request moving assistance due to lack of finances.
At this point the foreclosure process timeline, once the borrower has vacated the property, the lender can call the real estate agent and inform them that they can sell the property. In this scenario, the lender is not limited to the amount of money which they are owed.
