That said, entering into the process of financing the purchase of a foreclosed home can often be a harrying and confusing thing for someone not familiar with the procedure. Many people, caught up in the excitement of a court-steps auction or an internet bid-off, have committed to buying homes the true market value of which they knew nothing. It’s not unusual for new homeowners to discover that the immaculate facade of their purchase concealed a burnt-out wreck of a home – and that, as such, your chances of being granted a loan on short notice are slim in the extreme. At the same time, there’s always the chance you’ll find yourself in possession of an architectural jewel purchased for a fraction of its real value.

The fact is, it’s a rare bank that has the manpower or the inclination to monitor the condition of its foreclosed properties. Empty and bereft of security, foreclosed homes are a magnet for vagrants only too eager to strip houses of wiring, plumbing and other such essentials. This is why buying and selling foreclosed homes is not a part-time job – your research into the state and market potential of your intended purchase must be extensive if it’s not to be a bigger gamble than it’s worth.

The best idea is to hire a property lawyer who will help you determine the viability of your purchase for you, taking into account the contract your lender has available for financing the purchase of foreclosed homes. You could also hire an independent contractor to maximize the potential for resale of your new property.

If you live in the United States, keep in mind that if you need to finance the purchase of a foreclosed home you stand to benefit from the Foreclosure Prevention Act of 2008, which grants buyers a $7000 tax credit so long as they intend to use the new home as their primary residence for at least two years. In many cases this injection of cash alone can make financing the purchase of a foreclosed home a lot less challenging. Homes in many parts of the U.S. are selling for below that amount. Instant profit is sure to be sweet music in the ears of any lender.

When trying to determine if you stand to profit from the purchase of a foreclosed home, take the long view. Are foreclosures on the rise in the area in which you plan to buy? Speak to a few estate agents to find out. If they are, prices are likely to continue dropping, as nobody wants to live in an area that has had a lot of foreclosures – such neighborhoods tend to attract large numbers of vagrants and criminals.

And remember that the only way you stand to profit from this is in the long term – think in years, not months. If you’re going to live in the home you’ve chosen, make sure you’re comfortable to continue living in and maintaining your home until reselling becomes a profitable option.

Foreclosure is the proceeding in which a lender is granted a court-ordered termination of a borrower’s right of redemption (which is essentially the right to make good on one’s debts). In the case of residential mortgage foreclosures, the mortgagee, usually the bank or some other creditor, attempts to sell or repossess a property that has not been paid for in compliance with the original deed of trust (in other words, the borrower has defaulted on their loan). During this process, the court can grant the borrower a continuance on their right of redemption if the borrower pays the outstanding debt.

‘Acceleration’ is the term used to describe the lender’s legal right to declare the whole debt on the borrower’s mortgage payable at once. Mortgages may also have an acceleration clause calling on the borrower to notify the lender should there be any transfer of lease, title or interest on a property – if they fail to do so, they will be subject to acceleration. For lender’s that have granted mortgages without this clause, there are only two available options: either the lender can wait until all the borrower’s payments come due, or else attempt to convince a court to allow the sale of some portion of that property that roughly equals the amount owed. This is why virtually all mortgages these days have built-in acceleration clauses.

Often borrowers (also called mortgagers) have to pay Private Mortgage Insurance for as long as the amount owed on a mortgage is more than four fifths of the property’s value. In most instances, the PMI in combination with the money from the foreclosure auction will be enough to ensure that the lender will have some significant amount of the loan returned to them. If, however, there is no such insurance, and the lender’s losses will not be covered, the court can enter a deficiency judgment against the mortgager, giving the lender the right to sell other items of the mortgager’s property should the mortgager be unable to pay the difference.

There are several different types of foreclosure, two of which are the most frequently used. These are foreclosure by judicial sale, and foreclosure by power of sale.

The first is essentially the selling of the mortgaged property under court supervision. The proceeds go firstly to pay off the rest of the mortgage, secondly to satisfy debts to any other lenders to whom the borrower is indebted, and lastly (if anything is left) to the borrower.

Power of sale foreclosure, by contrast, calls for the selling of the property, with no court supervision, by the lender, which, due to the lender’s vested interest in the sale, usually proves quicker than judicial foreclosure (though the proceeds are parsed up in exactly the same way).

Another, less widespread form of foreclosure is strict foreclosure, which, if the mortgager fails to pay their debt within the period specified by an initial, post-default court order, grants the lender full title to the property with no obligation to sell it. In centuries past this was the most widespread method of foreclosure, but it has since been confined to cases in which the appraised value of a given property is less than the debt owed on it.

Either of these processes can move quickly or with glacial slowness depending on the state, country or court through which they are directed, and the legal tactics used by each party in attempting to prove its case as the valid one (as has been seen recently in the United States with high numbers of contested foreclosures succeeding due to shortfalls in lenders’ paperwork). Short sales, alternate financing, refinancing or even the declaration of bankruptcy can provide mortgagers with ways to avoid the negative credit-rating implications of a foreclosure.

1. The Short Sale

A short sale, in real-estate terms, is one in which the price at which the house is sold falls short of covering the balance remaining on the borrower’s loan. In most cases of short sale, the bank (or whoever the lender happens to be) approves of a proposed short sale and discounts the balance in light of some financial problem on the borrower’s part, or a slump in the real estate market. Such lenience is, however, not a given, and needs to be explicitly stated in the short sale agreement.

You can count on banks deciding to allow a short sale only if they believe it will result in a smaller financial loss to them than foreclosing (as the carrying costs associated with foreclosure might make foreclosure less favourable). Normally this will be decided after an appraisal has determined the approximate value of the home. Short sales typically go ahead much faster than foreclosures, and are also much more favourable for home owners as they help them avoid the negative effect of a foreclosure on their credit report.

2. Refinancing

If you have an ARM (no, not the limb; the acronym stands for Adjustable Rate Mortgage) or a hybrid ARM that includes the clause that payments will increase after the first couple of years, and if you’re having trouble making the increased payments, you should probably find out if it’s feasible for you to refinance. Refinancing is essentially taking out another mortgage to pay off your loan, and in the above-mentioned case, switching to a fixed-rate loan might be the best thing for you.

Take a look at your original contract, keeping an eye out for prepayment penalties, as many ARMs force borrowers to pay large sums in compensation if they decide to refinance in the first few years. The difference may mean that refinancing is not worth your while, especially if you intend to sell soon. If, on the other hand, it’s your intention to stay put in your abode, refinancing could be the financial boon you’re after.

3. Reinstatement

If you’ve already defaulted on your loan, a reinstatement will involve paying your lender the entire overdue amount, along with any fees or penalties for the late payment, by an agreed-upon date. This is a good avenue to pursue if your payment problems are only temporary.

4. Repayment Plan

Essentially the same as reinstatement, only instead of you paying your lender back in a lump sum, a portion of the money you owe will be added to your normal payments, allowing you to pay off your debt by increments.

5. Forbearance

While this option won’t be much help if you’re living a life above your means, it’s a good option for those whose income has been temporarily reduced – who are, for example, on maternity or disability leave and are soon to return to work and a steady income. In cases like these, the lender may be willing to reduce or even suspend mortgage payments for an agreed-upon time, after which normal payments will resume with the addition of the payment of a lump sum or further partial payments for several months to help bring the loan back up to speed.

6. Filing for bankruptcy

Bankruptcy features last on this list as it’s generally considered the last resort of debt management in avoiding foreclosure. If you and your lender have been unable to agree on any of the above-mentioned solutions, and yet you still have a regular source of income, filing for bankruptcy might help you keep a hold of property, like a mortgaged house or car that you’d otherwise lose. In some cases, courts may approve a repayment plan allowing you to use your future income to pay off debts over a period spanning as much as five years – after which you’ll be discharged of all debts.

While this may sound like a neat option if you’re in a desperate situation, it’s important to keep in mind that bankruptcy can remain on your credit report for up to a decade, making it tougher to buy another home, get life insurance or even apply for a new job.

Prior to contesting a foreclosure, it is often necessary to buy time for legal council to wade through the necessary documentation and make its case. Since the right of redemption is an equitable one, the borrower can begin by asking an equity court for an injunction, essentially forcing the lender to cease all actions regarding repossession and foreclosure. If repossession is near at hand, the borrower may even be forced to take out a temporary restraining order. Still, the borrower may have to post a bond equalling the debt. This is intended as a means of protecting the creditor should the borrower’s efforts to halt the foreclosure prove to be merely an attempt to cheat the lender and escape their debt.

Following the staying of the lender’s hand, contestation of the foreclosure on one’s home can ensue. One of the first legitimate reasons for contesting a loan in foreclosure (of which much has been made in recent days due to two highly publicized court cases in the U.S.) is that the lender often does not legally own the loan. Many loans are sold in ‘pools’ consisting of several hundred or even thousands of loans. In the past, many such pools have, it seems, been sold without the original lender following the legal requirements of sale of the mortgage and its accompanying promissory note – which includes signing off on an assignment indicating the transfer of ownership.

Often the purchasing parties have been banks or other financial institutions, which in turn sold the rights to the monthly mortgage payment income to investors, while transferring the responsibility to collect those payments to companies specializing in mortgage services.

The end result is that neither the bank, nor the investors, nor the companies can legally be said to own the mortgage contract. Having acquired these pools, they nonetheless don’t actually possess the legal right to bring forward an action for foreclosure. In cases where the original lending companies have gone out of business, it becomes pretty much impossible for the new loan owners to acquire the necessary assignments, meaning that, for borrowers in the position of having such a mortgage contract (and lawyers quick enough to see the facts) it becomes impossible for anyone to bring foreclosure actions on their homes.

This means that their debt is reduced to nothing, and that, for all practical purposes, they own their homes free and clear. Rulings in such cases are, however, brought without prejudice – meaning that banks that succeed in later acquiring an original assignment can resume foreclosure proceedings.

The second legitimate method of contesting foreclosure, at least in the U.S., involves alleging that the initial loan documents were legally fraudulent. Many lenders in the U.S. have, in the past few decades, routinely violated laws by misusing legally accepted loan practices, including disclosure requirements and requirements on fair lending practices. Some have gone further by engaging in blatantly predatory lending practices. These last involve untruthful or improper or untruthful marketing and selling practices that can be proven in some way to exploit mortgagers.

If you think that you have been subject to any of the above-mentioned practices, your best bet is to get in contact with a qualified attorney, who will (hopefully) be informed of the most recent developments in his field, and be able to guide you through the often torturous convolutions of legal proceedings.