Pre-foreclosure home selling: what you should know

When you default on your mortgage payments and the bank is threatening to foreclose, you may feel as if you have no options. Selling your home in pre-foreclosure is one option and it can be a solution to your problem. Pre-foreclosure home selling is a unique proposition and there are some things you should know before proceeding.

What is Pre-Foreclosure?

Many homeowners don't even know what the pre-foreclosure period is. It is the period of time between the point when your loan goes into default and the point it goes into foreclosure. A mortgage will typically be considered in default when it is somewhere between three and six months behind. (Althoguh this can vary depending on the laws in your states and the terms and conditions of your mortgage.) The official determination of the pre-foreclosure period starts when your bank or mortgagee sends you a Notice of Default (NOD). This NOD will specifically spell out what options are afforded you for correcting the financial situation and what the timeframe for correcting your financial challenges will be.

During pre-foreclosure, the loan holder is encouraged by the lender to correct the problem before the foreclosing process begins. In many cases and situations, the solution to the problem is selling the home in pre-foreclosure.

What are the advantages of pre-foreclosure selling?

The clear advantage to selling your home in pre-foreclosure is that your financial obligation will be met before your situation can reflect negatively on your credit report. If your home goes into foreclosure, you may not be eligible for another home loan for a long period of time. The potential damage to yoru credit score and credit-worthiness caused by a foreclosure can mean that future lenders will be less likely to give you a loan. If you sell your home during pre-foreclosure, and you follow the proper procedures, you can use the proceeds of the sale to settle your loan agreement and stave off future negative credit ratings. If you’re able to sell your home in pre-foreclosure for more than what is left on your loan, you can use the excess for a down payment on a new home that is more suitable for your budget.

What are the disadvantages to pre-foreclosure selling?

Since the pre-foreclosure period does not last very long, homes sold in pre-foreclosure often sell for much less than the market value. While you may be able to pay off your financial obligation on the property in pre-foreclosure, it is likely you will sell your home for less than you would prefer. Homes sold in pre-foreclosure are often sold at auction. An auction setting could reduce the amount you get for the sale of your house as you can never be assured of what the bidding activity will generate and there will be costs associated with the auction itself

Can anybody sell a home in pre-foreclosure?

While the specific terms and conditions of your mortgage should spell out all the remedial options you have should you fall behind in your payments. There are some general rules of thumb for determining if you qualify to sell your home in pre-foreclosure:

• The appraised value of the home in pre-foreclosure must be 70 percent or more of the principal amount that is owed on the home loan
• The home in pre-foreclosure must sell for at least 95 percent of its appraised value

For a more in-depth description of terms and requirements for selling a home in pre-foreclosure, consult Reply!’s article on the subject. You can see that article by clicking here.

What if I still owe money after the pre-foreclosure sale of my home?

If your mortgage is a totally private loan, you will want to negotiate terms and review the conditions of your mortgage before embarking on any pre-foreclosure selling activities. Given the huge increase in the number of US homeowners facing some level of financial distress, and given the dramatic decrease in property values in the wake of the nation’s housing crisis, more and more private lenders and banks have been willing to work with distressed homeowners seeking to sell a home in pre-foreclosure as a remedy to a potential foreclosure.

Many homes in pre-foreclosure may qualify for a “short sale” in pre-foreclosure.  A short sale is a sale where the expected proceeds from the sale knowingly fall short of whatever outstanding liens or encumbrances are attached to the home, but in which the lender and/or lienholders agree to accept to sale proceeds as a complete fulfillment of the outstanding obligations. (Caution is advised in these circumstances as some private lenders and lienholders will not accept short sales.)

The vast majority of home mortgages in the US (between 90-95% according to the Federal Reserve Bank and the US Department of Housing & Urban Development (HUD)) are backed by the federal government. In these circumstances, HUD has specifically developed a program whereby distressed homeowners in pre-foreclosure can sell their homes and retire their outstanding mortgage balances, including second mortgages or home-equity loans. Under this program, mortgagees and some lienholders can receive limited remuneration from the federal government of the proceeds from a pre-foreclosure sales does not completely satisfy the outstanding balance(s).

(For all of the details on this program, click here.)

The financial and emotional stress created when you fall behind on your house payments can snowball and make your life nearly unbearable. Pre-foreclosure home selling is one option that can relieve that stress, especially when managed successfully. Having the assistance of a seasoned real estate professional with experience in this arena could prove invaluable and Reply! can help by linking you to local real estate professionals with just that kind of experience.