Property Foreclosure: Meaning, Initiation Process & Measures to Avoid It

Every individual buying or selling a house in a real estate market should remain aware of certain terms. One such term is property foreclosure. If you are keen to know what this term denotes and other related details, keep reading this article.

What Is Property Foreclosure?

Whenever an individual purchases a house with a home loan, he or she must repay the loan within a specified time. If that individual fails to repay this debt, the home or property ownership transfers from the homeowner to the bank and that property or home is deemed to be in foreclosure.

After completion of a foreclosure process, the bank holds the legal right to sell that property or home to get the unpaid loan amount the borrower failed to repay. A borrower cannot defy this, as every home loan agreement has a clause that provides the bank with the right to own and sell a mortgaged property if there is a default in repayment of monthly instalments for more than 6 months.

When Does a Bank Initiate Foreclosure of Property?

when does bank initiate foreclosure of property — (Source: salcineslaw)

A property foreclosure is not always the first choice of a bank. The bank only charges a penalty whenever a borrower fails to repay home loan EMI for the first time. It is only when default in loan repayment continues for three months that the bank starts to send notices to the concerned individual. If that borrower continues to default in repaying the loan for 6 months, that is when the bank starts the property foreclosure process.

It is crucial to note that repossessing and selling a property through auction is a time-consuming and complicated process. It requires a considerable monetary expenditure and proper assessment. This is why several banks hire third-party agencies to manage this process. Therefore, banks usually do not want to start the foreclosure process unless it is extremely necessary.

How to Avoid Foreclosure of Property?

Individuals can avoid foreclosure of property by following the measures listed below:

In Case a Lender Wants to Negotiate

Get in touch with the home loan lender as the latter can help to delay the foreclosure process. A lender can offer the following options after communicating with the borrower:

Refinancing

Refinancing means obtaining a new loan from a similar lender or a different one to repay the existing debt. In this, an individual tries to avail a loan at a lower interest rate than the one charged on an existing loan. If the home loan is charged at a floating interest rate, a lender may opt to lower the same whenever there is a reduction in the general interest rate in the economy.

However, there is still a possibility that individuals may be forced to acquire a loan at a higher interest rate since there is no obligation for a lender to lower the interest rate of a home loan. Therefore, it is essential to shop around, communicate with a lender and then select a new loan that fits the requirement.

Choosing a Moratorium

A loan moratorium delays the repayment of outstanding home loan amount and provides an individual a grace period before he or she starts to repay the loan through EMIs. Though this process helps one to tackle a liquidity crisis, it does not waive off interest rates. It can also lead to the imposition of additional charges that can further put a burden on one's future financial plans. So, an individual must ensure to own adequate funds to meet such future financial requirements.

Modification of Loan

Individuals can opt for an MCLR-based home loan. This is because the interest rate under it is lower than the base interest rate provided by several banks. This is because the repo rate is considered while computing the marginal cost of funds. So, this is a great option to lower the interest rate of a home loan.

Alternatively, if individuals receive surplus funds, they can avail an overdraft facility in a home loan account. They can deposit the surplus money there, which will further reduce the loan tenure and interest payment.

In Case a Lender Does Not Want to Negotiate

Individuals can opt for the following measures if lenders do not want to negotiate:

Contact Home Loan Counsellor

A reputed home loan counsellor can make an appropriate emergency plan by analysing an individual's financial circumstances and the home loan he or she has opted for.

Consider Filing for Bankruptcy

Filing for bankruptcy can negatively impact one's credit score and lower the chances of acquiring loans in future. An individual can consider this as the last resort if there are no other possible solutions. This will delay the foreclosure process or remove the existing debt.

What Are the Pros and Cons of Buying a Foreclosed Property?

Consider the following pros and cons of purchasing a foreclosed property:

Pros

Most foreclosed housing properties are sold at a price lower than the market value.
High return on investment
A faster transaction ensures purchasing a foreclosed property within the shortest possible time.

Cons

If one purchases a foreclosed property in an auction, he or she cannot check what is inside the house beforehand.
A buyer may need to spend a lot of money on repair works in the house.
It is a competitive market, making it difficult for buyers to purchase a foreclosed property.
Buying a foreclosed property may require substantial funds, especially if an individual is buying it at an auction.

Should an Individual Purchase a Foreclosed Property?

A foreclosed property is sold lower than its actual market value. Therefore, if buying an affordable property is a concern for a buyer, then he or she can opt to purchase it. However, this new owner may need to manage all the financial, legal and other physical liabilities related to the foreclosed property.

He or she may need to vacate the property if the existing tenant does not want to move out or pay the unpaid utility bills. Besides, if an individual plans to borrow a loan to buy a foreclosed property, several lenders may reject the loan application. This means the buyer may need to close the deal using his or her own funds.

Thus, a buyer must consider the risks involved in purchasing a foreclosed property and other details about property foreclosure to avoid any hassle in future.

Frequently Asked Questions

✓ How long does the foreclosure process take to complete?

A foreclosure process may take around 4 to 5 months to complete if no problem arises in between.

✓ Do all foreclosed properties go through auctioning?

Not every foreclosed property goes through auctions. A few banks only make a list of foreclosed properties and make them available to the public. Interested individuals can submit their offers which a relevant authority will examine.