Knowing when to throw in the towel on your mortgage may help you prevent additional losses that could result if your lender forecloses on your property. In some situations, a pre-foreclosure sale may benefit you, the lender or both.
First, a pre-foreclosure sale benefits you by helping you avoid the embarassment and hassle of foreclosure. You can normally remain in the home up until the time of the loan closing, giving you additional time to arrange a move to your next residence.
If you happen to have equity in the home, a pre-foreclosure sale can help you preserve that equity. Otherwise, the lender retains any surplus from the sale over your loan balance should the home be foreclosed. If your home has negative equity, special lender approval is required for any short sale.
A pre-foreclosure sale can also benefit the lender. Your lender may be inundated with other foreclosure proceedings. They may be somewhat flexible if you can arrange the terms of a pre-foreclosure sale and find the buyer for them.
Lenders incur the legal costs of foreclosure and must pay to maintain the property until it is sold. Lenders rarely are able to recoup all of this related cost, so they may be willing to work with you if it means they can skip these expenses.
To sweeten the deal for lenders, the Department of Housing and Urban Development (HUD) may make a payment of $1,000 to your lender if you complete a pre-foreclosure sale. HUD may also provide $1,000 to you should you successfully complete the sale (payment disallowed for sales resulting in a surplus).
Qualifications for Pre-Foreclosure Sale
A pre-foreclosure sale may be an option if you meet certain requirements:
- You must already be at least 30 days delinquent on your mortgage loan.
- Negative equity cannot exceed 63% of the debt to value ratio.
- You must currently reside at the home.
- You must be able to prove an increase in living expenses or drop in income as a factor in the delinquency.
If a shortage of at least $1,000 is expected, then a pre-foreclosure sale may be a recommended option to sell the home and limit additional damage to your credit and finances.
How to Complete Pre-Foreclosure Sale
Lenders will require an honest effort to sell the home as a condition of allowing a pre-foreclosure sale. They may give you an average of 4-6 months to sell the home before proceeding with foreclosure. An honest effort includes the following stipulations:
- The property must be aggressively marketed through a licensed real estate agent.
- You must maintain the property.
- You must occupy the home while keeping it in showable condition.
An experienced real estate agent may be able to help you navigate a pre-foreclosure sale. Many homeowners find it helpful to obtain legal advice or to seek housing counseling from a HUD-approved housing counseling organization. Sometimes a housing counselor may recommend other mortgage help options that might be more feasible for your situation.
A pre-foreclosure sale may be difficult in a tumoltous real estate market. Still, there may be investors looking to snap up a distressed property at a below-market price. If you lender approves their bid, you could avert foreclosure and move on.