What is Pre-Foreclosure?
When you take out a mortgage on a home you are buying, you agree to pay monthly installments to the bank. When you fail to make your mortgage payments for 3 months you will receive a default notice that signifies you are officially in pre-foreclosure. This means that the bank will take legal action if you do not catch up on your late payments. You have the choice, at this time, to either make the late payments or sell your property before your home is officially foreclosed on.
When the homeowner is officially in pre-foreclosure they usually are given anywhere from 3 to 10 months act before the property is officially foreclosed. The homeowner can make their missed payments during this time and the bank will then take the property out of pre-foreclosure.
The homeowner can also try to sell their home during this pre-foreclosure stage. If the homeowner owes more than the home is worth the bank may agree to a short sale. This means an interested party can purchase the home from the homeowner for less than the mortgage. This is a great option for a home buyer because it allows them to usually get a good deal on a home from a bank that is willing to accept the short sale instead of a foreclosure.
The bank must always approve the short sale before the realtor can proceed with the sale. They will run numbers and look at appraisals and neighborhood comps to make sure this is a fair deal for everyone.
Is it better to short sale or foreclose on your property?
If you decide to short sale your home, there are definitely some benefits. You get to remain in control of your home and can also control the sale of your home. You also get to avoid that horrible stigma that comes with foreclosure.
If you are looking for an immediate solution you may want to foreclose. You can immediately stop payments on your home until the bank officially kicks you out. You are also not in control of the sale so you are not required to fix anything that is broken in the home.
Short sale and foreclosure will both impact your credit score. Recent studies have shown both will affect your credit score in the same way. Your score may drop as many as 300 points. This will stay on your credit score for at least 7 years. This can affect your ability to purchase another home or a car. It can also make it difficult to get insurance. However, if you continue to pay your bills, keep your balances low, and are on time with your payments your credit score will slowly creep back up.
Buying a Pre-Foreclosure
If you are looking to buy a home, you may wonder about purchasing pre foreclosure homes. A pre-foreclosure can be a great option because they are usually priced at a bargain. However, they are sometimes hard to find and hard to buy.
Just because a homeowner is in pre-foreclosure doesn’t mean their home is for sale. It just means that the bank has issued a notice of default on their property.
A lot of times, homeowners in pre-foreclosure are open to selling their home to qualified buyers. To find pre-foreclosures you may want to start by looking online. Websites such as Zillow often times show homes that are in pre-foreclosure. Or, county newspapers or websites will sometimes post foreclosure notices.
After you find a pre-foreclosure that interests you, go make sure it is a home you would want to buy. It is wise to drive by and check out the home and the property before you inquire further. If you are still interested, you could drop off a note or letter explaining that you are qualified to purchase their home and would like more information.
You may want to speak with a foreclosure specialist to help you with the process. They can give you status updates on the home and whether or not it is still in pre-foreclosure. Your foreclosure specialist can also help you determine how much the owner owes on the house. Sometimes there are several mortgages or liens that can make the process quite complicated.
Try to figure out the fair market value of the home. Check out recent sales in the neighborhood. Figure out about how much the home is worth versus how much is owed on the home. If you still would like to proceed it is time to talk to the homeowner directly. It is important to be aware of the homeowner’s delicate emotions regarding their home. You may want to tread lightly. Be sure you are positive and understanding.
In a kind way, you can speak with the homeowner and let them know you are interested in purchasing the home. You can ask to see the home and ask questions if the homeowner seems interested in your proposal.
Most times, the homeowner will not be interested in selling the home right away. They will want time to see if they can get their finances in order. If this is the case, be sure to leave them your contact information so they can get in touch with you if they change their mind.
If you and the homeowner decide to make a deal, now is the time to put in in writing. Draw up a purchase agreement. It may be a good idea to get some help from an experienced realtor. Make sure to put the sale contingent the title coming back clean and a home inspection.
If everything continues to go well, you can go ahead and seal the deal. Use an escrow company to manage the sale of the property. A pre-foreclosure can be a stressful time for a homeowner. But there are options. Be sure to check with your lender and a foreclosure expert to see what the best course of action is for you.
Purchasing a pre-foreclosure can be an excellent investment. Although, it can be a difficult process. Be sure to speak to someone who is skilled in the process of buying pre-foreclosure properties.