Pre-Foreclosure Sale

If you're a homeowner facing foreclosure, you'll likely want to know about pre-foreclosure sales. You may be able to sell your home while it's in foreclosure. In this way, you could pay off the debt, and not have to undergo foreclosure.

Continue reading to learn more about pre-foreclosure sales.

What Is a Pre-Foreclosure Sale?

To understand pre-foreclosure sales, it helps first to know what foreclosure is. It also helps to know why it's a good idea to avoid a foreclosure. When you fall behind on your mortgage payments, your mortgage holder can gain ownership of your property. If you fall far enough behind on your payments, you are considered as having defaulted on your mortgage loan.

Lenders can sell your foreclosed home in order to pay off the debt you still owe. If the sale doesn't cover what you owe, the lender may be able to sue you for the difference. Keep this in mind as you weigh the possible outcomes of foreclosure, and make sure you sell your home at a price that is not below market value. There are always ways to mitigate losses. Selling your home at the highest possible cost is one of the ways to do that.

How Foreclosure Effects Credit History

A foreclosure causes significant damage to your credit score. Foreclosure makes it difficult to borrow money in the future because of how badly it affects credit reports. In that way, it signals to lenders that you are not a secure borrower.

Having a foreclosed property in your credit history can have severely negative consequences for attempts at future borrowing. While this information is not on public record, it is available to lenders.

The pre-foreclosure process may be the time when you can avoid foreclosure by engaging in a pre-foreclosure sale. Keep reading to learn how to prevent becoming a home buyer with a history of foreclosure. In the next sections, you'll learn how you can accomplish this by engaging in a pre-foreclosure sale.

What Is Pre-Foreclosure?

Pre-foreclosure occurs at the beginning of a legal proceeding related to a lender's taking ownership of your pre-foreclosure home or pre-foreclosure property. Often, this process concludes with a property being taken back by the lender from the borrower who has defaulted. It starts with the lender filing a notice of default. This is a legal notice that occurs only after the borrower has exceeded the number of late payments permitted under the mortgage agreement.

Alternatives to Foreclosure

There are alternatives every homeowner should explore before turning to foreclosure. A pre-foreclosure sale is such an alternative. A pre-foreclosure sale occurs between the time that your lender initiates the foreclosure process and the conclusion of the foreclosure.

During the period between the time your lender initiates the foreclosure process and the conclusion of it, you still legally own the home. As a result, you can try to sell it to satisfy your outstanding debt and avoid foreclosure. During this timeframe, you should work with a real estate agent or realtor to sell the home. You should not do so without proper help. Again, maximizing the sale price of your home can make things much easier. A broker can help you do that.

If you cannot reach another agreement with your lender, you may need to consider a pre-foreclosure sale. Of course, you may be able to negotiate a payment plan or loan modification. This might involve a refinance. You might be able to apply for forbearance, among other options, but know that you might be able to execute a pre-foreclosure sale.

What Is a Pre-Foreclosure Short Sale?

If you decide that you can't keep your house, the pre-foreclosure sale allows the defaulting homeowner to satisfy their debt by selling the property. If the home sells for less than what is owed on the mortgage, it is called a short sale.

In order to have this type of sale satisfy your debt in full, the lender must agree both to the sale and to forgive the remaining balance on your mortgage. Otherwise, you will still be responsible for the amount over and above the sale price of the house. This type of arrangement with your mortgage lender allows you to avoid foreclosure and many of its detrimental consequences.

How Pre-foreclosure Sales Affect Your Credit Score

Unfortunately, there are some unpleasant costs and consequences associated with a pre-foreclosure sale. The first is obvious: you've lost your home and need to find new housing. If your credit took a hit from your late mortgage payments or other past-due bills, securing a loan for a new home may be difficult, as well. However, it might not be as difficult as foreclosure would have made it. 

In addition, many landlords use credit reports to assess whether you're reliable enough to pay rent on time, so it could hinder your search for a rental. Missing monthly payments creates issues with obtaining credit and securing rental spaces and mortgages in the future.

Another significant consequence of a pre-foreclosure sale is the tax bill the government might send you. In general, if you owe a debt to someone and they cancel or forgive all or part of that debt, you have to report the forgiven amount as income on your taxes.

Consider the following example to understand the above-described set of tax consequences. You owe $200,000 on your mortgage and the pre-foreclosure sale price on your house is $150,000. If the lender forgives the remaining $50,000, you have to report that $50,000 as taxable income. However, there are exceptions to this rule, including bankruptcy, insolvency, and the Mortgage Forgiveness Debt Relief Act.

Buying a House in a Pre-Foreclosure Sale

If you're thinking of buying a house in a pre-foreclosure sale, you may get a good deal. However, you should do your research and understand the timeline. Since the owner is usually still living in the house and is probably considering all of their pre-foreclosure options, the process may take extra time. If the house is worth less than what the owner owes on it, their mortgage holder will have to approve the sale.

Conversely, the lender may actually be close to foreclosing on the property altogether, shortening your timeline. In addition to these considerations, you, your attorney, or your real estate company will need to research market values. You'll also need to consider all the costs and fees while making sure there are no other liens against the property.

In your research, you will likely be able to find a record of whether a home is in foreclosure at the county recorder's office. That information may not be available in some states, so it's important to verify the laws of your state.

Make an Informed Decision About Your Pre-Foreclosure Options

The prospect of losing your home and significantly damaging your credit in foreclosure can be overwhelming, but it's a scenario that many homeowners face, especially when the job market is hurting and house prices have dropped.

To help make an informed decision about your home, contact an attorney experienced in foreclosure and pre-foreclosure alternatives, including deed-in-lieu of foreclosure options. Foreclosure proceedings are stressful. It's important to get the help you need.