Understand the Pre-foreclosure Process

The ins, outs, ups and downs of the pre-foreclosure process.

Are you a homeowner facing pre-foreclosure, a first-time home buyer hoping to benefit from a sale price on a pre-foreclosure, or a real estate investor looking to expand your inventory of properties by investing in foreclosures? You have many options available to you, but doing some research is essential. There are three stages of foreclosure, with the buying and selling process different for each one of them. Since pre-foreclosure is the earliest phase, it presents a one-time opportunity for buyers and sellers to interrupt the foreclosure process and prevent it from reaching its ultimate end, whereupon homeowners lose their home, and the property becomes official bank-owned property. To help you understand the pre-foreclosure process better, here are the advantages and disadvantages of investing in distressed properties at this early stage.

Stages of foreclosure

In a nutshell, here’s how it all works:

Pre-foreclosure: Homeowners fail to pay their mortgages for a period of three to six months, during which time they are issued a warning from the lender to pay up (within three months) or lose their home. At this early stage in the game, homeowners have several options by which to delay or prevent losing their home.

Auction stage: If homeowners are financially unable to meet their debts and/or fail to heed the bank’s warning, they are evicted from their property, which the bank auctions off to the highest bidder.

Foreclosure: If the property is not sold at auction, the home goes back on the market as a bank-owned property (REO; Real Estate Owned) (typically at below market value prices).

Pre-foreclosure options for homeowners

If you receive a “Notice of Default” from your lender, indicating that you have not paid your mortgage loan fees for 90 days to six months, do not despair. You still have many viable solutions to help you delay or prevent foreclosure entirely. If you have positive equity; (your current mortgage balance is less than the value of your home), you can try to refinance your mortgage loan. To avoid foreclosure altogether, try selling your home, and use the funds earned to repay the lender. To avoid imminent foreclosure, ask the bank to permit a short sale, wherein you sell your home for less than what it’s worth, and the bank writes off the difference. As a last resort, file for bankruptcy; however, while this buys you some time to repay your debts, your credit will take a significant hit and you won’t be eligible for another loan for a period of five to seven years.

Avoiding foreclosure will save your credit score going forward

  • Foreclosures can drop credit scores from 250 to 300 points
  • Short Sales can drop credit scores from 80 to 100 points

Be able to re-purchase sooner rather than later

  • Short Sales and Foreclosures remain on your credit for 7 to 10 years
  • New mortgage programs may be available within 1 to 5 years with a short sale

Receive funds for selling your underwater property

  • HAFA may provide up to $3,000 in relocation assistance

Pre-foreclosure options for home buyers

The following well-known adage aptly captures the position of home buyers during pre-foreclosure: “One person’s loss is another person’s gain.” While foreclosure is bad news for homeowners, home buyers can use pre-foreclosure to their advantage as they shop for a low-priced home. Home buyer options include: Contacting the distressed homeowner through your Realtor with an offer, convincing that person that selling the property to you would be a win-win situation. Benefits include bidding on the property before it goes to public auction, more time to get your finances in order before closing, and not having to deal with bank officials. If the bank approves a short sale process for the homeowner, your offer must be accepted by both the lender and the homeowner. However, given that the very definition of a short sale means savings for you, you could get a great deal on a good home when you invest in a short sale. Whether you are buying or selling a home, now that you understand the pre-foreclosure process, pre-foreclosure could be the key to keeping your real estate goals and dreams alive.

If you would like to discuss the short sale process in more detail, CONTACT ME before it’s too late!