Foreclosure with Equity?

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It’s hard to imagine in this day and age with the amount of information available on the internet about how homeowners can avoid foreclosure that they still happen.  But they do.  Although the foreclosure process ends with the possession of the home (the collateral for the mortgage loan) returned back to the bank that is servicing the mortgage, what some people still don’t realize is this:  foreclosures with equity can be just as common a foreclosures without.  What is a foreclosure with equity?  It’s a foreclosure of a home that is worth more than what is owed on the outstanding mortgage.  Banks that service the mortgage loan for homeowners will use a Trustee to handle the business of sending notices and ultimately the sale of the property at auction if a mortgage is in default (has not been paid in full and on time).  In some cases, a property that is sold above what is owed on the original mortgage+interest+legal fees is classified as an Equity Foreclosure, meaning, the amount over what is owed to the bank is equity, the borrower’s equity.  BUT the borrower must makes a demand to the Trustee for the equity portion to be returned!  Although the bank does not get to keep this “overage” the borrower must make a demand to receive it.  The foreclosing Trustee will almost never make an effort to find the borrower if the borrower is still owed money from the sale of the property.  It is very important to understand that a borrower who has equity in their home can still experience a death, divorce, disability, loss of employment or income source or a variety of other “life events” that can cause a borrower to get behind on their payments.  If the payments continue to remain unpaid the bank who is servicing the loan can still move to foreclose the home, even if the home has equity.  One strategy to avoid foreclosure of a home with equity is the sale lease-back.  As a true win-win strategy it allows the borrower to lease back their home from a new buyer with a promise that they will be able to purchase the property back after a certain period of time has passed.  After the borrower repairs the financial damage that caused them to get behind on their payments, the borrower (who will temporarily become a tenant) will have the option to purchase the house back in the future at an agreed upon price.   The new buyer and the borrower will negotiate how the equity in the property is split before either party enters into the sale of the house and after reviewing the contract with qualified legal counsel.  The equity in this scenario is used by the borrower as a bargaining chip with the buyer and in turn offers the opportunity for a buyer to earn a return on dormant cash that might be earning a meager 1% or less in a savings account.  In my next article I will discuss ways to avoid foreclosure of homes that have no equity.  To your prosperity!

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