What Is A Foreclosure ?

Take a look in the newspaper, and you will see that a number of homes are up for sale with massive “foreclosure” signs outside of them. What does this mean, and why are those signs different from the normal “for sale” signs which are put up when a house is placed on the market?

This is a very good question, and for people who are not familiar with the real estate market, it may be a little daunting to ask someone – for fear of being looked at as a dull consumer.

In this article, we will explain exactly what a foreclosure is, why it happens, and why you want to avoid such a thing in your own real estate situation.

Failure To Pay

Let's start right from the beginning. When you want to purchase a house, it is very common for people to take out a loan from their bank or financial organisation, to cover the full purchase price. After all, it is not very often that people have $500,000 sitting in the bank.

Perhaps you have $30,000 sitting in your account. Depending on which bank you choose to get a loan through, this money would be enough to warrant a $500,000 loan which we call a mortgage.

You pay the $30,000 towards the purchase price of the house, and the bank will cover the remaining $470,000. This would mean that you have a mortgage worth $470,000, with a house worth $500,000. Hence, you have $30,000 equity currently in your house.

But, let's say that you certainly cannot afford to make the repayments on this $470,000 mortgage. Obviously, repayments happen either bi-weekly or monthly, and they are usually for the same amount every time.

If you are unable to make a payment, or if you fall behind in your payment schedule, your bank may try to call on the loan. If this is the case, you will be required to either sell the house, come up with the remaining amount which is left on the mortgage, or take other drastic action to refinance the property.

Inability To Compromise

If you are unable to do any of these things, a foreclosure will result. This is when a bank seizes the house that you are currently living in, and puts it on the market in order to recuperate the loan which had lent you. Indeed, this is a bad thing, and will mean that you have to move out and find another place to learn.

It will also destroy your credit, and will make it much harder to buy things on finance in the future.