eli5: how do people buy homes that are foreclosed?


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!

In: 4

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.

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.

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.