Almost half a million homes in the United States entered into foreclosure proceedings in 2019. This is a common issue in the real estate industry, especially in COVID-19 times.
If you have an outstanding loan and are currently behind on mortgage payments for a property that you own, this guide on pre-foreclosures can help as a homeowner or investor.
Pre-foreclosure homes can be saved and not foreclosed upon. Below are some tips to help you keep your property or save your credit.
What Is a Pre-Foreclosure in Real Estate?
A pre-foreclosure is the first step in the process of repossessing property from an owner who has defaulted on a mortgage loan.
When you buy a home, you sign a contract that you’ll pay your mortgage on time. A typical mortgage contract is set up so that a borrower is considered in default if they miss multiple payments consecutively. Contractually, if a borrower misses these payments, the lender has the right to take legal action, and hence, the homeowner will face the danger of losing their property through a foreclosure.
The First Steps Of The Pre-Foreclosure Process
During the process of pre-foreclosure, a notice of default is filed with the county or parish recorder and will be part of the public record. This notice of default will also serve as notice to the property owner that legal action to foreclose on the property has started.
If you’re in pre-foreclosure and have received a foreclosure notice for your property, you still have time to negotiate a settlement or pay your default balance. This could end pre-foreclosure proceedings and help you avoid foreclosure.
As owners of the home, you could also attempt to sell it to pay your mortgage off.
How Long Is the Pre-Foreclosure Process?
Foreclosures can take several months in some cases.
The courts will finalize the proceedings and send the notice of eviction if the default is not resolved. This process can take well over a year depending on the state your property is in.
The Difference Between Pre-Foreclosure and Foreclosure
Pre-foreclosures are when homeowners receive a default notice letting them know that their mortgage is in arrears and foreclosure may be imminent.
Foreclosure is when the lending institution takes back the unpaid property from the owner. However, you can fight back by requesting a loan modification.
If possible, the property owner can pursue a modification to pay the defaulted payments or look to sell the home to avoid the foreclosure process.
Advantages and Disadvantages of a Pre-Foreclosure
During pre-foreclosures, a home can always be sold by the owner. This is often the best option for both parties.
Once the house is foreclosed, the bank or lender has full control over what happens to the property. A foreclosure is also very damaging to a homeowner’s credit. Selling a home during the pre-foreclosure process could help avoid this situation.
Pre-foreclosure properties can be a great opportunity for buyers, investors and real estate agents
For buyers and investors, buying a pre-foreclosure can be a great deal on a home so there is likely to be interest from potential buyers. Pre-foreclosure homes may be sold at a discount below market price to get a quick sale. This may make it easier to sell your house. A buyer would check with the public records for the home to see the appraised value and tax liens to determine value of the property.
Selling during pre-foreclosure may require more disclosures
Selling homes during pre-foreclosure are encouraged by the lenders. The lender won’t have to pay for foreclosure proceedings, saving thousands of dollars. They also won’t have to sell the home on their own if they take possession of the property during a foreclosure.
As the borrower, while you get rid of mortgage payment obligations, selling your home in pre-foreclosure is tougher than with a traditional sale. There are legal and financial disclosures the seller must provide in the pre-foreclosure listings. Sellers will also need to make buyers aware of any liens on the property.
Sellers will also need to disclose any unpaid taxes on the home. Taxes are often transferred to new homeowners. This means that buyers who purchase a pre-foreclosure home are responsible for the unpaid taxes.
Your bank or lender has the right to further pursue pre-foreclosure proceedings if the home isn’t sold or the payments aren’t made current or settled. Eventually, the court will allow the lender to evict the homeowner.
What Happens After a Foreclosure?
Once the homeowner is evicted through a foreclosure, the real estate property can then be sold. A home that has been repossessed is often sold at a foreclosure auction and may be considered to be real estate owned by the bank that repossessed the home.
These properties are often purchased by investors who see the opportunity to purchase a property for less than market value, make some improvements to it then flip it.
A home sold after a foreclosure is often sold at a discount or much less than the average market rates. Selling a home for less than it’s worth is still less expensive than carrying the mortgage loan and other carrying costs like insurance and taxes.
Real estate investors or prospective owners will often engage a title company to do their due diligence and transfer the deed title.
What Are the Steps To Avoid Foreclosure?
Talk to your lender. With everything going on in the world right now, there are also more options available for assistance. If you’re out of work because of COVID-19, there are assistance programs to help you defer or adjust your payments.
Foreclosures are also tough to move on from in terms of credit history. A pre-foreclosure will remain on your credit report for the next seven years. Here are 3 steps you can take.
Get a loan modification for homeowners
A loan modification takes the balance of the payments you owe and rolls them into your mortgage. Let’s say you’re behind $10,000 on your mortgage. That $10,000 is added to your mortgage balance and paid each month. While you’re negotiating a modification, you’ll want to try and make at least partial payments in good faith.
Refinance your house mortgage
You can also add years to your mortgage to lower your payments through a refinance. This can help make your monthly payments more affordable. In some cases, if you can resume monthly payments, a portion of your unpaid balance is forgiven.
Sell your home in the open market or by auction
Selling your home is another way to avoid pre-foreclosure. If you have any equity in your home, you can pay off your mortgage when you sell and avoid foreclosure. Furthermore, there are many prospective owners who are specifically looking for this type of properties whether that be an investor or a cash home buyer.
Can You Sell a House That’s In Pre-Foreclosure?
Short sales are when a home is sold for less than the homeowners owe on their mortgage. As an example, if you sell your home for $200,000 but you owe $250,000 on your mortgage, you still owe the bank $50,000 on your home.
If you have the funds, you can pay the $50,000 outright. This won’t reflect poorly on your credit and you won’t owe anything to your bank or lender.
However, sellers will often still need to pay the balance they owe in a short sale. A home sold through a short sale is actually done through the lender. This means the potential buyer will need to negotiate with the lender on the final purchase price.
The money given at closing will go directly to the lender to apply to your loan balance. If the lender accepts a loss, this money is often forgiven by the lender. The original homeowner won’t need to pay that money back after the sale.
The reason this is called a short sale is because the homeowner is short. Seller may not have the $50,000 needed to pay off the mortgage. The lender must agree to take a loss on the property and approve a short sale.
What to consider
The lenders selling a home want to get as much as they can for the home and usually won’t go too far under the real price of the property if they don’t have to. The price will be negotiated and may still be under the loan balance, but may not be as low as a buyer would like.
In this scenario, the prospective owner or investor will often be buying the home as-is when they make an offer. They often do not get the full inspection process, although they can do a neighborhood analysis. You also won’t get to negotiate for repairs in a short sale as you would with a traditional sale. These types of sales are popular with a real estate investor who is building their portfolio of investment properties.
Be Smart When Purchasing a Home
To avoid pre-foreclosures or defaulting on mortgages there are things you can do before buying a home or real estate. First, you’ll want to make sure you have enough money saved for a rainy day.
Make sure to to have a few months’ worth of mortgage payments saved. This could be anywhere from three months to a year.
The more you have saved, the bigger cushion you’ll have to help prevent a pre-foreclosure property issue. You’ll be able to cover your mortgage payments for a few months until you get back on your feet.
What to do before buying a home
Before you buy your home, you’ll also want to make sure it’s affordable. Just because you qualify for $300,000 from your bank doesn’t mean you should buy a home that is $300,000, whether you’re directly purchasing a property listed on Zillow or by auction.
Staying under budget will help you save more each month and help you avoid ever having to deal with a pre-foreclosure home experience where sellers are often at a disadvantage
If you are in need of assistance and are interested in learning more about selling a pre-foreclosure home, fill out our contact form.
You’ll get in touch with an expert who can help you find the best solution for your pre-foreclosure situation, whether that’s negotiating with your lender or by selling your home for cash.
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