Recent increases in defaulted mortgage loans may present opportunities for homebuyers looking for deals, but purchasing a foreclosed home can be a touchy situation.

It's been said that one person's misfortune is another person's gain. In the area of home foreclosures, however, there's so much misfortune to spread around that it can be tough to locate the gain. Give yourself a helping hand by knowing how foreclosures work, before you start looking for your great gain.

The American nightmare

No one buys a home expecting to face foreclosure. This financial catastrophe usually results from a series of unfortunate personal or financial circumstances that couldn't be remedied, like losing one's job, or becoming unable to work, due to an injury or medical condition. A married couple may have split up, leaving both partners without the resources to continue paying the mortgage. Or, adjustable-rate mortgage payments may have risen steeply outside the borrower's budget. No matter what the reason, tensions will be running high, and the homeowner is likely to feel angry, stressed out, and desperate.

A party who walks into a foreclosure situation in search of a good deal has two options: Directly buy the mortgage of the homeowner in distress, or bid on foreclosed properties at a public auction.

Pre-foreclosure purchase

It may be beneficial to negotiate a sale directly with the homeowner and the lender prior to the public auction. To do this, you first have to research and understand the foreclosure laws in your state. These generally define how the lender notifies the homeowner and the public of the impending auction, as well as the time period between the public notice and the auction date. You should also research what type of paperwork is necessary to document your purchase of the home-most states have specific requirements.

In such situations, all parties benefit from a pre-foreclosure sale. You get a good price on the property, and the homeowner and lender are spared from proceeding with a public auction. In order to achieve this, you'll have to feel comfortable inserting yourself into a highly sensitive and stressful situation. You'll be tasked with contacting the homeowner personally to find out if the pre-foreclosure sale is even a possibility. Your communications may be well received, but it could also be viewed with hostility.

Auction purchase

You can find information about upcoming public auctions at your county recorder's office. Often, you'll have to document your financial qualifications prior to bidding. You may also have to submit a deposit with your bid, to demonstrate your intent to purchase the property. You may or may not have the opportunity to Walk-through">walk through the home prior to bidding. Auctioned properties are sold as is-so if you can't preview the property, be very careful in the amount that you're willing to pay.

Finding a great foreclosure deal may get easier as the mortgage misfortune in the U.S. continues to run its course. Just be sure to do your homework, so that misfortune doesn't hit you, too.