i also don’t really get “foreclosed” i’m guessing it means they’ve missed mortgage payments?
Edit: thanks everyone, lots of good info here!
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Missing payments is the start of it but it is a fairly long process measured in months. The bank or loan company will have to foreclose the mortgage (ie send papers and some places require that the lender go to the court for approval)
In the US, there may be foreclosure sales which is essentially the same as any other listing on the market except that you may not get to negotiate a lot on what the owner will do (prior to sales) but in exchange you might get a slightly lower priced home. A foreclosure sales just means you are likely buying the property off a bank or lender. There is a bit more due diligence needed (ensure that all the bills/liens are paid off) but a competent real estate agent should take care of this for you.
short version: foreclosed means the bank that lent you the mortgage to buy the house has reclaimed it, because you couldn’t repay them. Their ability to do so is buried in the mortgage agreement as a penalty for the buyer if he doesnt keep his end of the bargin.
so, yes, it means you’ve missed sufficient mortgage payments you’ve lost the house.
So, you’re right in that they’re because of missed mortgage payments. Basically, a mortgage is a document that says “The bank is buying this house for you to live in, and you will pay X amount every month for Y years, and after that you will own the house” in a lot of legal language. This is considered a type of secure loan, in that there is collateral attached to the loan that can be repossessed if you fall into default (that is: they’ve stopped assuming that you’re ever going to pay off the debt). When you default on a mortgage and the bank “repossesses” your house, that’s called a foreclosure for obscure legal reasons that don’t merit getting into (and also that I couldn’t reasonably explain as I don’t really understand them fully either)
As to how people buy foreclosed homes: the bank takes ownership, but banks don’t have much use for a house that is sitting alone, not generating them an income through mortgage interest, so they sell that house. Because of how people are, a lot of times if someone is being evicted due to a foreclosure, they’ll trash the house on their way out. Or, other times, the reasons they stopped paying are things like a disability stopping them from working that also had an adverse effect on their ability to keep up with maintenance on the house.
But I digress – sometimes when a house gets foreclosed, they’ll get put up for auction. Other times they’ll get listed by a real estate agent. There are other ways that a foreclosed house can be sold, but I don’t fully understand them and they’re outside the scope of ELI5 most likely, but those are the two main ways.
A mortgage is a loan that you take from a bank in order to purchase a home. In exchange for the loan, you pay it back with interest over time and the bank has an interest in the home until you repay in full. Foreclosure is what happens when you get a loan from a bank to buy a house and miss enough payments (called defaulting) so that the bank goes to court to kick you out and take possession of the house. Banks don’t really want or have any use for houses, so they sell them. That’s what it means to buy a foreclosed home – you purchased a home from the bank that the bank repossessed from someone who defaulted on their mortgage.
Most people don’t own houses, their banks do.
Someone gets into financial difficulties – perhaps they lose their job and can’t find another. The bank eventually gives up hoping for an easy resolution and sells the house.
All the bank really cares about is selling the house for more than the mortgage. The person living there is often in denial and so stages the home poorly, even though any extra on the sale price goes to them.
Someone buys a house and misses payments. Eventually the bank decides they’ve missed too many payments and starts the legal process to take ownership of the house and kick them out. Once the dust settles on that, the bank owns the house and hires a realtor to sell it, and other people can buy the house.
It’s often a cheap way to get a house, because the people getting kicked out are often mad at the bank, and damage the house on the way out.
When people take out a bank loan for a home the home itself is usually listed as collateral in the loan paperwork. (i.e. *”If I can’t pay you back, you can take the house I bought with that money as repayment.”*)
Foreclosure is what it’s called when somebody has failed to make mortgage payments (defaulted), etc. for long enough that the bank actually follows through with the act of taking the collateral. It is basically another kind of repossession. (i.e. *”Fine, if you don’t want to pay me back, I’m taking the house then.”*)
However, owning a house doesn’t really do a bank any good so typically they’ll want to simply sell the home for as much money as possible as quickly as possible – usually through a housing auction.
People “buy foreclosed homes” by going to these kinds of auctions and making the winning bid.
Lots of good info here on buying homes foreclosed by banks. Properties can also be foreclosed by governments due to unpaid taxes. You go to the courthouse steps on auction days, shout the highest number, cut a big check, and get the deed. It’s pretty risky, because the property may not be in livable condition.
You owe money on a house. You stop paying. The person or bank you owe money to then initiates foreclosure. Numbers may vary, but:
You have 90 days to make up arrears. If you fail to do so, the full amount is due at 90 days. Then a notice of sale is sent, usually saying the house can be sold in 21 days.
After 21 days the house goes up for auction. The bidding often starts around what is owed (including foreclosure and selling costs), which is usually, especially in the current housing market, far below the actual value of the house. The people bidding usually intend to buy it, fix it up, and resell it, so the highest bid usually doesn’t get anywhere near what the house would sell for. The house is also sold as-is, no inspections, and that naturally means its sale price will be lower than a regular sale (which comes with inspections, etc.). The former owner gets the leftover money, if any.
Thus, you buy foreclosure homes because you can get them on the cheap and make a profit reselling. Sometimes individuals may be interested, but individuals usually don’t want to buy a house without inspection even if it does come cheap. Even in such cases it’s going to be that special person willing to take the risk and with the money to fix anything wrong.
Now if you’re behind on the mortgage and what you owe is more than the value of the house, you can agree to a short sale with the bank as an alternative to foreclosure. You let the bank sell it right then. The bank will usually take the loss, and you’re out from underneath the mortgage (this happened a lot in the 2008 housing crash). If what you owe is less than the value of the house (more likely today), then you should be able to sell it to get market value, pay off the lender, and walk away with far more money than you would have gotten in a foreclosure auction.
A few people have said that banks generally want to get rid of the foreclosed houses.
My house was a foreclosed house, owned by bank of america. I dont know about any other banks, but BOA couldnt of cared less if we took my house off their hands (with a BOA mortgage btw). My realtor told me before we put in an offer that banks were very difficult to work with, and BOA was one of the worst. He wasnt wrong, they missed the 2nd closing date, screwed up paperwork, wouldnt return calls, completely ridgid when there was problems.
In fact there was an IRS problem, we asked them to extend the 1st closing date by a week to give it time to appear on the IRS systems. Nope, deal completely feel through. 2 weeks later they listed the house again, my IRS problem was fixed so I put in another offer on my house…my realtor said “Take 10% off what you agreed to last time”…which they accepted.
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