Looking to buy a home in pre-foreclosure? Financial assistance may be available
If you're planning on buying a home in pre-foreclosure, lining up financing can be a challenge. There are only a handful of financial assistance programs available for people looking to purchase a home in pre-foreclosure that can make the process a little less daunting, but researching them can be well worth the effort.
When it comes to financial assistance, pre-foreclosure buying programs are hard to come by. One problem is that it's very difficult to get financing approved for a pre-foreclosure quickly enough.
What is pre-foreclosure? What is a short sale?
A home falls into pre-foreclosure when the owners have fallen behind on mortgage payments and the lender has sent a formal Notice of Default (NOD) to the homeowner. (In some states, lenders can do this after one missed payment. Yet, in other states lenders extend this to as much as 180 days.) The homeowners then have a limited amount of time between the receipt of a NOD and the start of full-blown foreclosure proceedings to either make up the past due payments or sell the home to get out from under the debt. Once the homeowner gets a Notice of Sale (NOS), the home is slated for auction.
Compare local foreclosure listings and short sale listings here.
It is within this short timeframe that you have to get financing in place. You can get financing for a home in pre-foreclosure from many lenders, if the home meets home value requirements based on an appraisal and passes a home inspection. Of course, you may also have the option of working with the original lender on a creative solution such as making up the arrears on and assuming the existing loan.
If the homeowners owe more on the house than it is worth, the original lender is not going to get back all of its money in a pre-foreclosure sale. In this instance, the lender must approve a short-sale price. Short sales are a type of pre-foreclosure sale in which the lender agrees to a price lower than the mortgage balance because the home value has dropped significantly. If you want to buy a short sale, both the homeowner and the lender must approve your offer.
You'll also need to research the home's title because it is common for more than one lender to have a stake in in the property (and a lien on the house). In this case, all of the lenders will have to approve the new financing.
Options for financing a home in pre-foreclosure
The good news is that you may be able to get a government-backed mortgage for a home in pre-foreclosure, especially if you are:
- First-time homebuyers
- Buying a home in an economically distressed area
- Buying low-income or affordable housing
- Buying a home as a military veteran
If you are buying a home in pre-foreclosure that is owned by the U.S. Department of Housing and Urban Development (HUD), there are a number of incentive programs including loans with low down payments and attractive interest rates. These HUD homes are sold through a HUD short-sale program. You may also qualify for loan programs through Fannie Mae.
Drawbacks of pre-foreclosure sales
Many lenders won't agree to a pre-foreclosure sale, especially a short sale, until the homeowners have gone through an extensive process to prove they cannot sell the house for what's owed on the mortgage and they don't have the money to get the mortgage current.
Likewise, you will have to submit all of your financial and credit information to get approved for financing, yet the approval and rate quote may expire in the time it takes to negotiate a sale with the lender who holds the house deed.
Even if all of the sale negotiations and financing get completed in a timely fashion, the sale may also fall through if the house doesn't meet the requirements of the home inspection. Often, homeowners struggling to pay the mortgage don't have the money needed to do repairs and basic maintenance on the home.
Buying a home on pre-foreclosure could result in a new home for a price lower than market value, but the process can be challenging. You will need a real estate agent who specializes in pre-foreclosure sales and short sales to help navigage the road blocks and negotiate with the lenders. Reply! can help by connecting you with local real estate professionals who can serve as your guide.