Foreclosure Quiz Answers

Remember; score 9 points for each correct answer.

1.

As a general rule, foreclosed homes sell for less than their market value.

False
Good deals are out there, but you can never assume that you’re getting a bargain simply because it’s a foreclosed property. In states where home prices have risen the most, foreclosed properties sell within 5 percent of their full market value, according to a study by First American Real Estate Solutions, a Santa Ana, Calif., company that maintains a national database of real estate data. Plus, homes that are discounted are often located in unstable communities, are poorly maintained, and require costly improvements — reasons why the prior homeowners didn’t just sell the property before defaulting. Furthermore, the lenders that own foreclosed properties are usually prevented from accepting offers lower than appraised value, at least during the first several months that a home is on the market, says Richard Courtney who wrote a chapter on “Foreclosures: Fool’s Gold” in his book Buyers are Liars & Sellers are Too! (Fireside Books/Simon & Schuster, 2006).

2.

If you bid on a foreclosed property at an auction, you also may be bidding on tax liens and other debt accrued by the prior homeowners.

True
Before you bid on a foreclosed property at auction, make sure you know what debts are part of the package. Conduct a title search to determine if any liens or fees are connected to the property. You may discover that you’d be taking on the previous owner’s senior liens (or first mortgages); junior liens (second mortgages or additional claims against the property), or tax liens (unpaid property taxes), says Ralph R. Roberts and Joe Kraynak in their book Foreclosure Investing for Dummies (Wiley, 2007).

3.

The housing boom masked the high number of homeowners who’ve struggled with paying their subprime loans — and these homeowners may now be at high risk of foreclosure.

True
For many borrowers, strong house price growth increased the amount of equity in their homes and made it possible for them to refinance their mortgages despite being behind on the monthly payments, according to the Center for Responsible Lending. As housing prices decline, subprime foreclosures will rise, the organization’s research says; fewer delinquent borrowers will have the equity needed to refinance their loan or sell their home to avoid foreclosure.

4.

Homeowners who always pay their mortgage on time don’t need to worry about foreclosed homes in their neighborhood.

False
Foreclosed properties can hurt the value of nearby properties and even have a negative effect on local crime rates, research shows. Municipalities also take a financial hit: In a study on foreclosures in Chicago, researchers found that each foreclosure cost the municipal government more than $30,000, according to a report by the Homeownership Preservation Foundation in Minneapolis. Even one foreclosure can decrease the value of the other homes within 1/8-mile by 1.44 percent, according to research by Dan Immergluck, associate professor of city and regional planning at Georgia Institute of Technology. That’s why the NATIONAL ASSOCIATION OF REALTORS® is encouraging practitioners to educate clients on smart borrowing options, with the goal of reducing the number of foreclosures and strengthening communities.

5.

Homeowners can sidestep foreclosure by transferring the title of their home to a foreclosure rescue company for a year or two.

False
Beware: This is a foreclosure rescue scam. As the number of foreclosures grows, so does foreclosure fraud, according the National Consumer Law Center in Boston. Homeowners who are desperate to avoid foreclosure may be swayed by unscrupulous companies that promise “fast cash” and “equity funding.” Here’s how one common scam works: A company claims it will help troubled homeowners avoid foreclosure if the owners sign over the title of their home for a year or two. As part of the agreement, the company says the owners can continue to live in the property and pay rent until they have the financial means to buy the home back from the company. However, once the company has the title, it sells the home to a third party, leaving the borrowers without a home or home equity. A handful of states have proposed or enacted legislation to deter foreclosure rescue fraud, such as by allowing homeowners to more easily back out of the deal.

6.

To purchase a HUD home (a home that’s in possession of the U.S. Department of Housing and Urban Development) you do not need to hold any special licenses or qualifications.

True
Anyone who has the money or can qualify for the necessary amount of mortgage financing can purchase a HUD Home. HUD acquires its properties through the foreclosure of mortgages insured by the Federal Housing Administration. But be sure you know the condition of the home before you submit your offer; HUD homes are sold “as is,” so you’ll need to cover the cost of repairs or other improvements to bring the property up to market standards.

7.

Reading the public notices at your local county courthouse — including bankruptcy claims and death certificates — is not an effective method of locating foreclosed properties.

False
Such legal notices are among the most effective tools that investors can use to find foreclosed properties, says Steve Berges in The Complete Guide to Investing in Foreclosures (AMACOM, 2006). From those documents, you can find the names of the owners and the property addresses. Another good way to generate leads: Advertise in newspapers, magazines, and other mediums to let homeowners and fellow real estate professionals know you’re interested in buying foreclosed properties.

8.

Once homeowners default on three mortgage payments, the home automatically goes into foreclosure.

False
Lenders are often willing to work out a solution other than foreclosure. Homeowners should notify their lenders as soon as they know they won’t be able to make a mortgage payment. Depending on the situation, lenders may give homeowners more time to pay off the loan, lower the interest rate, or add all the missed payments to the loan amount and then increase the monthly payment to cover the larger loan. Homeowners also may be able to make a partial payment or skip payments if they can show a reasonable plan to eventually catch up on their payments (this option is known as forbearance).

9.

In many states, owners of foreclosed homes can reclaim their property — even after someone else has already bought it — by paying off the loan along with any interest, taxes, and penalties.

True
All sales are not final in states with mandatory redemption periods. The foreclosed-upon homeowners can come back to redeem the property even after it has been sold. Mandatory redemption periods generally range from 10 days to a year after the sale. Experts advise buyers of foreclosed homes in redemption states to hold off on costly renovations during the redemption period in case the owner redeems the property. Only a non-redemption state will guarantee the property is yours following a sale. Otherwise, you’ll have to wait and see.

10.

Lenders stand to benefit when homeowners foreclose on properties.

False
Foreclosures are costly and time consuming for lenders, too. It’s simply not in their best interest for a homeowner to default on payments or lose a home to foreclosure. In fact, lenders would normally favor a short sale to a foreclosure because the bank’s financial loss will likely be far less. In a short sale, the lender often forgives some or all of the homeowners’ debt that remains after the property is sold.

11.

Once a bank takes possession of a foreclosed home, the previous owner is free of all financial obligations.

False
The IRS can still come back to bite. Former homeowners may still have to pay a tax on a portion of their mortgage loan after a foreclosure because the sale is technically considered income. NAR has been actively trying to eliminate this phantom tax since the mid-1990s. NAR argues that it’s unfair to impose tax on a phantom income when the seller lost the home to foreclosure and most likely doesn’t have money to pay the tax.