What is 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 or Lis Pendens. The foreclosure process can end one of four ways:
- 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.
- 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.
- A third party buys the property at a public auction at the end of the pre-foreclosure period.
- The lender takes ownership of the property, usually with the intent to re-sell it on the open market. Properties repossessed by the lender are also known as bank-owned or REO properties.
What is REO?
REO is an acronym for real estate owned and it is industry jargon for foreclosure property repossessed by banks or lenders. If a lender or bank is the highest bidder at a foreclosure auction — or if no third party bids at the auction — the property reverts back to the lender and becomes an REO. REOs are owned by banks.
One of the primary advantages of buying a bank-owned REO property is that investors are purchasing a property without liens or other encumbrances. Before lenders make REO properties available for sale, they typically expunge all liens or claims against the property. Any cloud on the title — a second or third mortgage, mechanics liens, taxes or any other liens attached by creditors — are wiped out.
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