Investing Assets & Markets Real Estate Investing What Is a Foreclosure Property? Foreclosure Property Explained in Less Than 5 Minutes By Aly J. Yale Aly J. Yale Twitter Aly J. Yale is the homebuying, home loans, and mortgages expert for The Balance. With over 10 years of experience as a freelance writer and journalist, Aly has also contributed to online media outlets including Forbes, The Motley Fool, CreditCards.com, and The Simple Dollar, with areas of focus covering real estate, mortgages, and related financial topics. She holds a bachelor's of science in communication from Texas Christian University. learn about our editorial policies Updated on April 10, 2022 Reviewed by Charlene Rhinehart Reviewed by Charlene Rhinehart Twitter Website Charlene Rhinehart is an expert in accounting, banking, investing, real estate, and personal finance. She is a CPA, CFE, Chair of the Illinois CPA Society Individual Tax Committee, and was recognized as one of Practice Ignition's Top 50 women in accounting. She is the founder of Wealth Women Daily and an author. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article Definition and Example of a Foreclosure How Does Foreclosure Work? Pros and Cons of Buying a Foreclosed Property Definition Foreclosure is the process of a lender seizing and selling a property to a new buyer when borrowers fail to make their mortgage payments as agreed. It enables the lender to recover at least some of the remaining mortgage balance. Photo: Big Stock Photo / Getty Images Definition and Example of a Foreclosure A mortgage forms a lien against a property. It gives a lender the legal right to take ownership if the borrower defaults. The lender will then almost always sell the property to recoup its losses after it's taken control of the home. This process is called "foreclosure." Investors and other buyers can then purchase these homes, often at auctions or directly from the bank or government agency that owns them. How Does Foreclosure Work? Foreclosures are likely to occur when the homeowner has failed to make agreed-upon payments on the mortgage, but the reasons behind nonpayment can vary. Sometimes, job or income loss is the culprit. Medical bills or credit card debt might make it impossible for the homeowner to stay afloat. Foreclosure can also be the result of bankruptcy, divorce, or disability. The Balance In some states, there must be a court proceeding before the home can be taken. Other states offer options that don't require a court to get involved. A lender can't legally foreclose on a home until the homeowner is at least 120 days behind on their mortgage payments. Pros and Cons of Buying a Foreclosed Property Pros May be priced lower than other homes on the market. Buyer may be able to buy a nicer or larger home than they could otherwise afford. Cons Homes often in disrepair, and sellers often won't, or can't, make repairs. Previous owner might be able to take the home back in some cases. The purchase process can be slow. Pros Explained May be priced lower than other homes on the market: Many buyers who consider buying a foreclosed property do so to save money. Not all bank-owned and foreclosed homes are a bargain, but many are priced at less than market value due to their state of disrepair. They also might be priced to sell quickly because of the lender’s need to recoup its losses. Buyer may be able to buy a nicer or larger home than they could otherwise afford: Buying a foreclosed home can help you to buy a property that would otherwise be out of your price range. Perhaps the house is in a high-demand area, or maybe it has more square footage than your budget would otherwse allow. Note The U.S. Department of Housing and Urban Development (HUD) even has some homes listed at $1. Cons Explained Homes often in disrepair: Foreclosed homes are often in poor shape. Many will need repairs that the seller doesn't want to, or can't afford to, make. Most foreclosed homes are sold as is. Most foreclosure auctions require cash in order to buy, so you might not be able to finance the purchase via a normal mortgage loan. A traditional home sale lets you include a home inspection clause and to negotiate on repairs and pricing based on the report's findings, but these sorts of requests and deals aren't allowed when you're buying a foreclosed home at auction. Previous owner might be able to take the home back in some cases: Many states have what's called “right of redemption” time frames. They allow the owner a period of time to catch up on payments and take back their home. The previous homeowner might "squat" in the home, staying even after it's sold. It could be hard to remove them and could even require legal proceedings. The prior homeowner isn't involved with the sale, so it can be tough to know what repairs have been made to the house before you move in. Banks don’t have records of this type of upkeep. The purchase process could be slow: You’re typically buying from a large bank or a private lender when you buy a foreclosure, so offers usually require more than one approval. It also might take longer to move the sale along. You can expect negotiations to be slower and more difficult than they would be with a traditional seller. Banks are looking to recoup as much of their losses as they can, so they'll likely present counteroffers during the talks. Your own counteroffer must be approved by many people. Key Takeaways Foreclosures occur when the owner of a home stops paying their mortgage and falls more than 120 days behind on the loan.Banks and government agencies claim these homes and then sell them to try to recoup their money, often to the highest bidder.You can buy foreclosed homes at auction or straight from the bank or agency.It’s often harder to deal with a foreclosure purchase when big banks are involved, but you'll probably pay less. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Consumer Financial Protection Bureau. "I Can’t Make My Mortgage Payments. How Long Will It Take Before I’ll Face Foreclosure?" Homebuying Institute. "How to Buy a Foreclosure Home." U.S. Department of Housing and Urban Development. "Dollar Homes." Wells Fargo. "Buying a Foreclosure."