Getting a default notice is the most devastating thing that can happen to a homeowner. It practically means a house is in pre-foreclosure and the owner is on the verge of losing it.
Because most homeowners are unsure of what to do in this situation, they make costly mistakes that will eventually cost them their homes.
To help distressed sellers navigate the rough terrains of pre-foreclosure, we create this all-in-one guide. But before we go into that:
What is pre-foreclosure?
Pre-foreclosure defines the legal process a lender starts when a homeowner is past due on his home loan. It is basically when a lender notifies a homeowner of continuous default in their mortgage payment. It is the first step of property repossession by the bank or lender.
You should note that you can’t lose your home during pre-foreclosure. It is like a period of grace a lender gives you to catch up with the default payment.
If you’ve just been served a default notice, you are not alone. According to ATTOM Data, about 156,253 properties faced foreclosure in the first six months of 2020 alone. What you need to know now is the time you have left to take action. This brings us to the next question:
How long does pre-foreclosure last?
Pre-foreclosure duration depends on the state you reside in. There are two ways states handle the foreclosure process. These are:
1. Judicial foreclosure
A judicial foreclosure process, as the name suggests, happens through court proceedings. The court gives a foreclosure order that may be carried out by law enforcement agents. This period between receiving a default notice and foreclosure could take several months or years.
For example, pre-foreclosure in New York takes more than 13 months because only judicial foreclosure is allowed there.
2. Non-judicial foreclosure
A non-foreclosure process takes just weeks or a few months to complete before a property is foreclosed. In these states where this type of foreclosure is practiced, there is no need for court proceedings.
Utah is mostly a non-judicial foreclosure state. Many banks here choose this process because it is cheaper and less complicated. However, banks may seek a deficiency judgment after a non-judicial foreclosure process.
What is a deficiency judgment?
This is a judgment passed on if your home’s sale produced less money than you owe the lender. This judgment usually ends with an agreement that the debtor pays the outstanding debt to the lender. If the debtor fails to comply with the judgment, the bank can sue them. When this happens, the court may decide to levy (meaning take or sell) the assets of the debtor. In other cases, they may force the garnishment of a percentage of wages through the debtor’s employer to ensure the debt gets paid or freeze the debtor’s account. In the end, most debtors have to file for bankruptcy to escape judgment.
How can I sell my home in pre-foreclosure?
If you know you can’t pay up before the due date, you may ask for an extension. However, if your lender refuses to extend, it would be wise to consider selling the house. Homeowners can sell their property during pre-foreclosure as it still belongs to them – legally. However, they must contact their lenders and make sure they are aware of the sale.
And you have to do all this fast to avoid foreclosure. If you are not able to sell your home before the foreclosure completes, your credit will receive immense damage. According to Ray Hooper, Education and Housing Director for the Consumer Credit Counseling Service of Greater Dallas, lenders can view foreclosure as more damaging to your credit than bankruptcy that doesn’t include the home. If you’re able to sell the home prior to foreclosure, the sale proceeds will then be used to settle the mortgage payment, the interests, and late payment penalties.
There are three ways homeowners in pre-foreclosure sell their homes. These are:
1. Traditional home selling
A homeowner in pre-foreclosure may choose to sell their home the traditional way – through a listing. With an excellent real estate agent, you may be able to sell a pre-foreclosure home for more despite the time constraint. But, this is highly unlikely.
Although an expert agent may help you get an extension of the foreclosure from your lender to enable better conditions for a home sale, you should never rely on that possibility because lenders have financial incentives to foreclose as quickly as possible, and there are still other factors to consider.
For one, you would need to make the necessary repairs to the home, which you almost certainly don’t have enough money for. If you do not fix your home, your buyer’s lender may refuse to give them the mortgage loan. Also, while you may attract many buyers due to the circumstance involved, many would want to bargain hard. If they find out that you’re desperate for a sale, they will likely offer you less than your house is worth.
Lastly, there is a time constraint factor. How fast can you prepare, market, and close the deal? After finding a pre-qualified, ready, and willing buyer, the closing process of the home sale can add as much as 30 – 60 days. If it takes 30 days to find that buyer, which may be unrealistically quick for a home that needs major repairs, it could be 60-90 days before the sale closes. Add that to the time spent preparing and marketing your home. Will your lender be willing to wait that long? Probably not. Moreover, the closer you get to the foreclosure deadline, the more you will incur bank fees. Therefore, selling through the traditional method may not be the best option for you. However, if you choose this option, a fast sale with an aggressively low price should be your priority.
2. Short sale
A short sale occurs when your lender allows you to sell your home for less than the loan you owe. If the lender allows, the homeowner will then find an agent and list their property for sale at a discount. Short sales can help you avoid foreclosure, but it is not a quick process.
Homeowners who take the short sale approach usually hope that the lender will forgive the rest of the loan. The debt pardon is likelier if the short sale can recoup a substantial percentage of the mortgage loan. Also, lenders may agree to a short sale to save them the cost of having to file a foreclosure suit, or worse, marketing a hard-to-sell foreclosed home. However, most home loans are federally insured to the lender, meaning the lender can usually recoup these costs through their insurance, so the bank may actually lose more money through a short sale than through a foreclosure.
Before agreeing to a short sale, lenders usually require proof of financial difficulties from the homeowner. They may also ask for an affidavit to ensure that the homeowner and buyer are not related. Lastly, lenders would ask the homeowners to move out before closing the deal.
These precautions are necessary to prevent short sale fraud. Short sale fraud occurs when a buyer transacts with the homeowner behind the lender’s back, usually through a separate agreement. For example, giving back part of the short sale proceeds to the homeowner, or selling the home back to them after the deal closes, can be examples of short sale fraud.
3. Selling to an investor
Selling to an investor is arguably the best option for many homeowners facing foreclosure.
With limited time available, homeowners can sell fast and get their money before repossession by the lender. An investor will buy your home without the need for repairs. They are ready to pay up as soon as you agree to the deal. You can also choose a flexible purchase option and make after-sale arrangements. To know more about the benefits of selling your house to an investor during pre-foreclosure, read: why should I sell my home to an investor during pre-foreclosure.
Whichever sale option you choose, always look out for predators who engage in a “foreclosure rescue scheme.”
What is a foreclosure rescue scheme?
This is when scammers take advantage of homeowners facing foreclosure by pretending to help them while all they want to do is actually rip them off their property and money. The most common type of foreclosure rescue scheme works like this: An “investor” or solicitor shows up and offers to pay off a debtor’s default mortgage payment. This person then convinces the debtor to transfer the title of the home as collateral for short-term finance. The investor will promise to allow the homeowner to stay in the home after paying. They may even say they will let them repurchase it later.
However, after taking ownership, the predator takes the house and leaves the homeowner with nothing. They then sell off the property or take off with the money.
Knowing how to detect these predators can be challenging. Many homeowners usually find out when it is too late to do anything about it. Some of the most glaring red flags of foreclosure rescue schemes are:
- High promises: When an investor offers a too-good-to-be-true deal, you should be wary of them. Examples of offers like this are agreements that propose very low interest rates.
- Offers buyback: While many legit investors do this, predators also offer to sell or rent back to homeowners before claiming ownership. But here is the twist, once they claim ownership, they increase the rent fee and drive the homeowner out. So look out for investors like this by knowing how to identify a legitimate investor.
- Unclear agreements: Predators might ask you to sign ambiguous deals. They are likely to claim this deal is the best option for you. Ensure you read through any agreements before signing.
- Mismatched terms: The biggest red flag is if the investor’s verbal promises don’t match the language in the written agreement. These investors know that courts will only believe the language in the written agreement, so you find a contradiction between the written agreement and the verbal agreement, a legitimate investor will be willing to update the written agreement to guarantee you’re not getting swindled.
Do you need to talk to an agent or an investor about your options?
Are you in pre-foreclosure? Do you need to talk to a real estate agent about your options?
Click on the form below to send us a message. We can also buy your pre-foreclosed home as an investor. We will assess your home within the shortest time frame possible (usually within three (3) business days) and offer you a fair price. After the offer is accepted, we can generally close in under ten (10) business days.
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