Foreclosures occur daily all across the country. In addition to hardships (loss of job or decreased income, death, divorce, etc.), another reason is an increase in monthly mortgage payments due to interest rate adjustments on adjustable rate mortgages (ARMs).This unfortunate situation has resulted in an influx of properties being sold below market value as foreclosures. Since the actual foreclosure process may vary by state, I thought it would be beneficial to review this process as it occurs in Virginia.

When a homeowner obtains a mortgage (note) in Virginia, the title to the purchased property, secured by the deed of trust, remains in trust until payment in full has been made on the loan. Usually the mortgage documents will include a power of sale clause, which allows a Trustee of the bank, usually an attorney, to foreclose on the property in case of default or non-payment. When a homeowner defaults on a mortgage loan, a non-judicial foreclosure will occur. It does not involve court action but requires notice. In order to use this foreclosure method, the power of sale language must be included in the notice and legal documents.

In a foreclosure, the following process occurs: the delinquent homeowner is notified that the foreclosure process has begun; a notice of default is delivered, which begins the pre-foreclosure period; a notice of sale is mailed, and legal notices may be published in local papers; the house is sold at public auction.

The requirements for a power of sale notice to initiate a foreclosure are as follows:

Notice of foreclosure must be advertised in a newspaper in the county in which the property is located at least once per day for three days or once per week for two weeks. If no advertisement procedure is included in the deed of trust, then the notice of foreclosure must be advertised once a week for four weeks.

Notice of foreclosure or a copy of the notice of foreclosure advertisement must be served on the defaulted borrower at least 14 days prior to the sale. It must also provide a description of the property and the time, place, and terms of the sale. The minimum length of time between the first ad and foreclosure sale is 8 days, while the maximum is 30 days after the last ad.

The property is auctioned to the highest bidder. However, what often happens is that the lender purchases the property at auction because it doesn’t sell for the desired price. The lender then lists it with a real estate professional for sale.

While it usually takes approximately 60-90 days for the foreclosure process to run its course, some delinquent homeowners are able to stay in the home for up to a year or longer. This delay is caused by the tremendous number of foreclosures in process. Although this longer timeframe is seen as a positive to the distressed homeowner, the condition of the home typically worsens, as the homeowner most often stops possessing pride in ownership or any other incentive to maintain the property. The perception of the poor condition and fact that it’s a foreclosed home reduce the value of the property. As more and more homes are sold at foreclosure prices, it begins to erode the value of traditional home values in our community.

As discussed in a previous article in this series, the credit score can be impacted more severely by a foreclosure than by a short sale. For a homeowner who faces a foreclosure, the credit score is not only affected by the foreclosure itself, but also by the late payments prior to the foreclosure. It is typical to see the homeowner paying late on other bills because of the financial crisis, and additional late payments, collections, or even judgments—all of which lower the credit score—are present. The formula for determining a credit score is complicated, so it is difficult to say with total certainly how many points a credit score would be lowered. However, the estimate of the impact on an individual’s credit report due to a foreclosure is from 125 to 150 points. Coupled with late payments on other bills, the total impact is approximately a 200-point decline, according to Bonnie Zapf, Senior Loan Officer with Virginia Heritage Bank. Additionally, Virginia is a “recourse” state, which means lenders reserve the right to attempt to collect losses from the borrower after the home has been sold as a foreclosure.

For those purchasing a foreclosure, the wait from contract ratification to closing is much shorter than for a short sale. The typical “close time” for a foreclosure is 45-60 days, while a short sale can take 6+ months. While foreclosures, like short sales, are often sold “as is,” typically the utilities have been terminated. Sometimes, in order to have a home inspection conducted, the prospective purchaser will have to pay the utility companies to restore the services for the inspection. Depending on the situation, however, sometimes the investor who foreclosed upon a property will partially renovate it prior to listing it with a Realtor for resale. This has been the case here at LOW with some foreclosures. I’ve also seen some properties that were in horrible condition purchased by an investor, completely remodeled, and then re-sold at fair market value. Can you get a great deal on a foreclosure? The answer is yes, you certainly can. But a home inspection is critical so that you know what you are getting and aren’t faced with too many costly surprises.

As of this writing (11/28/2011), there are currently 11 active and under contract foreclosure listings in Lake of the Woods (out of 150 total listings either active or under contract). How are we comparing to our neighbors? 7.3% of our active and under contract listings at Lake of the Woods are foreclosures, while 11.9% of both Spotsylvania and Culpeper Counties active and under contract listings are foreclosures.

If you have been keeping up to date with the news lately, you know that the number of foreclosures is expected to rise over at least the first quarter of 2012. According to realtytrac.com, an estimated one-million foreclosure-related notices for defaults, auctions, and home repossessions that should have been filed by lenders before year’s end will be pushed until 2012.

While we can’t affect those properties already in pre-foreclosure or foreclosure, we can have a profound impact on our Lake of the Woods community going forward. My plea, once again, is simple: if you, or those you know, are having trouble making the mortgage payment, don’t procrastinate. If the current situation will not improve immediately, ignoring it won’t make it go away. Get help now, even before you have missed a payment or made a late payment. Many local Realtors have the resources to assist a homeowner in distress and provide appropriate information regarding options. With knowledge comes power. Let’s use that power to reverse our statistics to reduce the number of foreclosures at Lake of the Woods, which most often benefits the homeowner and most certainly benefits us as a community.