Non-REO Foreclosure

What Is Non-REO Foreclosure?

A non-real estate owned foreclosure, or non-REO foreclosure, refers to a successful foreclosure on a real estate property. The foreclosure process starts after a borrower fails to make mortgage payments for several months, a time period defined within the terms of the mortgage. In a non-REO foreclosure, when the property in foreclosure is put up for auction, a purchaser agrees to pay the amount owed to the bank for the property, or less if the bank is willing to offer a discount.

How a Non-REO Foreclosure Works

With a mortgage loan, the home or property is used as collateral, meaning the lender has the right to take the property if the borrower fails to uphold the terms of the mortgage agreement. Typically, the foreclosure process generally begins when a borrower misses their payments. The bank or lender normally responds by sending a missed payment notice to the borrower. If the borrower continues to miss payments, the bank sends a demand letter.

After 90 days of missed payments, the lender issues a notice of default, which is the failure to make payments. The borrower might be granted more time to work with the bank to settle any outstanding payments and reinstate the loan. If no agreement can be worked out and the payments are still not received, the bank initiates the foreclosure, which is the legal process of taking it home and selling it to another buyer via an auction.

Short sale

To avoid foreclosure, the homeowner may put the property on the market via a real estate short sale. A short sale occurs when a financially distressed homeowner sells their home, or property for less than the amount due on the mortgage loan. If the homeowner is unable to quickly sell the property, the lender may repossess it and put it up for public auction.

Foreclosure auction

Foreclosure auctions often take place in county courthouses. The price of the property is typically the amount owed by the homeowner plus legal costs, though the lender may accept less in some situations. When a winning bidder purchases a property up for auction, the foreclosure is a non-REO foreclosure because the lender found a buyer and was not forced to take ownership.

Special Considerations: Foreclosure Relief

Homeowners who are behind on their mortgage payments because of the economic crisis that began in 2020 may qualify for forbearance protection. This was introduced with the passing of the $2 trillion CARES Act in March 2020.

Forbearance allows borrowers to skip payments in the short-term if they're experiencing financial hardship due to the economic crisis. It's important to note that missed payments are not forgiven. Instead, they are added to the end of the loan term. Forbearance from a lender can provide up to 180 days of payment relief.

Mortgages backed by government-sponsored entities (GSEs), such as Fannie Mae or Freddie Mac, cannot be foreclosed on by the bank or lender. When President Donald Trump signed the CARES Act, lenders and servicers were prohibited from foreclosing on borrowers until Dec. 31, 2020. President Joe Biden originally extended this deadline to March 31, 2021, when he signed an executive order on his first day in office. He extended the deadline again until June 30, 2021. On July 23, he pushed it out once more until until July 31, 2021, also extending the forbearance enrollment window through September 30, 2021, and providing up to three months of additional forbearance for certain borrowers.

Check with your lender to see if your mortgage is a GSE-backed loan in order to qualify for forbearance.

Borrowers can also request an extension for up to another 180 days for a total of up to 360 days. However, borrowers must contact their loan servicer or bank to request this form of forbearance. There will be no penalties, fees, or additional interest (beyond scheduled amounts) added to the loan.

Non-REO Foreclosure vs. Real Estate Owned

A non-REO foreclosure is different from a real estate owned foreclosure (REO). A non-REO foreclosure becomes a real estate owned foreclosure when an auction occurs, but no buyer comes forward with an offer that meets the minimum bid. With an REO property, the lender takes ownership and the bank, would in turn, often post the REO property online to resell it. Banks may also enlist the help of real estate agents to reach more buyers and speed up the selling process. To further entice buyers, lenders may list their REO properties at a discount and eliminate some of the expenses attached to their titles. For this reason, real estate owned properties may be a safer investment than non-REO foreclosures.

However, both REO and non-REO properties are often in need of significant repairs. Also, for investors who decide to wait until the local properties are bank-owned REOs, they might miss out on an opportunity to buy a non-REO property via an auction. In other words, a non-REO auction allows investors to get in earlier on buying foreclosed properties versus REO properties.

Advantages and Disadvantages of Non-REO Foreclosure

Foreclosed properties are attractive to buyers who are looking to buy property at a discount. As a result, public auctions tend to draw a crowd of interested buyers. Non-REO properties sometimes make it possible for buyers to purchase a property they would otherwise not be able to afford.

However, purchasing in a non-REO foreclosure is not without risk. Buyers of non-REO properties also owe any outstanding taxes and liens on the property. A lien is a legal claim to the property if it was used as collateral to satisfy a debt. Buyers of non-REO properties are also responsible for any maintenance that the property might need, which could be significant. It’s also possible the new owner may have to deal with evicting tenants who reside on the property.