Can I Sell My House Before Foreclosure?
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Foreclosures are lose-lose propositions for almost everyone involved. The good news is that there are several ways to avoid a foreclosure. One of the best options is selling the property before a foreclosure action is complete. In this guide, we’ll explain how you can sell your house to avoid completion of the foreclosure process. We’ll also discuss other options you can consider if selling your house for a profit isn’t possible at this time.
Written by Attorney Curtis Lee.
Updated July 19, 2021
Foreclosures are lose-lose propositions for almost everyone involved. Homeowners lose their homes. Banks have to spend money to complete the foreclosure process. Neighboring property values fall.
The good news is that there are several ways to avoid a foreclosure. One of the best options is selling the property before a foreclosure action is complete. In this guide, we’ll explain how you can sell your house to avoid completion of the foreclosure process. We’ll also discuss other options you can consider if selling your house for a profit isn’t possible at this time.
Selling Your House Before Foreclosure
In a foreclosure, the lender regains possession of a mortgaged property. A mortgage is a type of secured loan, where the property acts as collateral. Meaning, if the borrower defaults on the terms of their loan by failing to make payments, the lender can repossess the property that was purchased with the loan the lender extended to that now-delinquent borrower.
If you stop making mortgage payments and default on your mortgage loan, you are at risk of foreclosure. Foreclosure can lead to being evicted from your home and can ruin your credit history. Because the consequences of this process are so serious, many homeowners will look for almost any way to avoid foreclosure. One such solution is to sell your home before the foreclosure process is either initiated or completed, depending on your family’s unique circumstances.
How To Sell Your Home Before Foreclosure
There are two primary ways to sell your home before a foreclosure becomes a “done deal.” The first is through a short sale, which is an option discussed in detail below. The second is by selling your home in a normal real estate transaction. You can try to sell your home before or after the foreclosure process begins but not after a foreclosure action is complete. At that point, the property is owned by someone else, whether it’s the lender or a new homeowner.
If you want to sell your home instead of dealing with foreclosure, it’s best to explore this option as soon as you realize that you’re having financial difficulty that will prevent you from making on-time payments. This proactive approach will give you time to find a buyer who can offer a good price on your home. That said, if you wait until the foreclosure process has begun, you can still sell your home. It’s a time-sensitive process because you’ll have to sell it before the bank can repossess it or sell it at a foreclosure auction.
Luckily, many banks are willing to slow down the foreclosure process if it means you can sell your home and pay off everything you owe. The foreclosure process is expensive for lenders, so this can save the bank a lot of money. It can also save them the hassle of finding a new owner for your home.
Regardless of when or how you sell your home, make sure you can do it at a price that covers everything you owe to the lender. In addition to the principal, you’ll need enough to pay any penalties, interest, and fees. If you can’t sell your home at a price that covers all of this, then you may still owe the mortgage company or bank the difference between the amount you owe overall and the amount you received from the buyer. This difference is called a deficiency balance. If the bank attempts to recover this deficiency balance, they may do so by asking a court to grant them a deficiency judgment against you.
Given all of these considerations, one of the best ways to sell your home before foreclosure is by hiring a realtor. You’ll get a little bit less money when the house sells, but the real estate agent’s commission is likely going to be small compared to the benefits that they’ll offer you. Those benefits include:
Getting your house placed on the Multiple Listing Service (MLS)
Receiving advice on the best way to spruce up your home without spending too much money
Getting recommendations on how to price your home to maximize the proceeds while selling it as quickly as possible
Negotiating a short sale with your mortgage lender if your mortgage is underwater and a short sale is your only option
A real estate agent will be especially helpful if you’re trying to sell your home during the pre-foreclosure stage.
What Is Pre-Foreclosure?
Pre-foreclosure is the first step in the foreclosure process. It occurs when a homeowner’s mortgage is delinquent or in default but before the lender has taken significant legal action to recoup the overdue balance (also known as mortgage arrears). A default occurs when the homeowner is three months or more behind on their mortgage payments. If the homeowner continues to miss making monthly mortgage payments, then a lender will send them a notice of default. This is a public notice that the bank or mortgage company files with a court. This notice informs the borrower that their mortgage is in default.
During pre-foreclosure, homeowners will have the opportunity to work with their mortgage lenders to stop the foreclosure process. This is sometimes referred to as loss mitigation. Besides selling the property, other potential solutions to avoiding foreclosure include loan modifications and refinancing.
What Is A Loan Modification?
A loan modification is a permanent change to your mortgage loan that makes it easier for you to make your monthly mortgage payments. Many loan modifications decrease monthly payment amount obligations but lengthen the life of the loan, or how many years a borrower will have to make payments. Keep in mind that if you receive a loan modification, it could show up on your credit report. This could hurt your credit score but not as much as a foreclosure would… not by a long shot.
Loan modifications can be a great way to:
Lower your interest rate
Change the structure of your loan’s interest rate (from a variable to a fixed rate)
Roll any missed payments into the balance of your mortgage loan
Extend the life of your mortgage
Permanently forgive or temporarily set aside part of the principal (although these modifications are rare)
Loan modification eligibility requirements vary among lenders, but often applicants must apply for modification on their primary residence, have experienced a significant financial hardship (like a career change, job loss, or divorce), and have a steady source of income. Assuming that you meet these requirements, you’ll need to complete all necessary paperwork and provide relevant financial documentation to support your eligibility. This process often includes tracking down W-2 or pay stubs, tax returns, bank statements, a monthly expense worksheet, and a statement or affidavit describing your financial hardship.
Even if your lender approves your loan modification application, they may require you to complete a trial period of several months. This is your chance to demonstrate that you can afford to make your modified mortgage loan payments consistently.
It’s hard to know whether you’ll get approved for a loan modification before you apply. Your lender is the one who will ultimately decide. In general, the ideal applicant will be a homeowner who is on the brink of defaulting on the mortgage. This might be someone who hasn’t defaulted yet but has a great chance of doing so within the next few months but could likely avoid this outcome with a fairly straightforward loan modification.
What Is Refinancing?
If you refinance your mortgage, your lender will replace your current mortgage loan with a new one. Based on how you refinance your mortgage, you can expect one or more of the following:
A change to your monthly payment amount: Your monthly payment amount due may increase if you shorten the life of your home loan to save money on interest. Similarly, if you increase the life of your loan, your monthly payment amount due may decrease.
A lower interest rate
A change to your mortgage’s term: Lengthening the life of your mortgage will lower your monthly payments but may increase the total amount of money you’ll pay over the life of your loan.
The ability to cash out some of the equity in your home
A change in the structure of your loan
Changing the structure of your loan can save you money, even if most of the other major mortgage terms (like the interest rate and the length of the mortgage term) stay the same. For instance, if you achieve 20% or more in equity in your home, you can stop paying for private mortgage insurance (PMI). But depending on your loan’s terms, you might need to refinance the loan to take advantage of this opportunity.
Refinancing is often used by homeowners who have a steady source of income and a solid credit history. As a result, refinancing is especially common with homeowners who have extra money available and want to use it to pay off their mortgages more quickly to save money in the long run. It’s also popular with homeowners who have significant equity in their homes and would like to cash out some or all of it to pay for other expenses. Because refinancing involves replacing a mortgage with another one, it’s hard to get approved if you’re currently struggling financially.
To refinance your home, you must show that you’re financially able to afford a new home loan. Eligibility may require a certain income and credit score. You may also need to show that you have no other significant debts, such as a second mortgage.
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What Is A Short Sale?
If you’re trying to sell your home before the foreclosure process ends, you might be short on time. But that’s not what a short sale is intended to rectify. A short sale means selling your home for less than what you owe on the mortgage.
You might be wondering what makes a short sale such a big deal. People sell properties for a loss all the time. That’s true, but with most short sales, the lender agrees to take the loss, not the seller. If this sounds too good to be true, you may be wondering what the catch is. One catch is that lenders don’t have to agree to a short sale. Even though you’re the one selling your home, the bank has the right to prevent the sale if it leads to a loss the bank isn’t comfortable with. Another catch, discussed in detail below, is that you may be held responsible for the monetary loss resulting from the short sale.
A bank might agree to a short sale if they feel any loss from the short sale will be less than what they’ll lose in the foreclosure process. Banks might also agree to the short sale of a home if it means getting rid of it faster.
How Short Sales Work
Most short sales take three to four months to complete. Some can take as long as a year, and others may close in less than two months. Short sales sometimes begin with the homeowner listing their home for sale and indicating it’s a short sale. Another option is for the homeowner to contact the lender and explain the situation. From there, the homeowner can find out if a short sale will be approved, once a buyer has been identified, if the sale amount reaches a target threshold. Lenders may also require homeowners to consider other options to avoid a short sale and prevent the homeowner from losing the home.
Before a bank approves a short sale, it’ll ask for a variety of financial information from the seller, including proof of the seller’s financial hardship and general information about the seller’s overall financial health. The bank will also ask for information from the prospective buyer. In addition to the offer price, the buyer may also need to submit:
Proof of ability to obtain financing
A purchase contract
After the bank receives the buyer’s offer, they may respond with a counteroffer. The counteroffer could include a higher selling price, but it may also ask the buyer to agree to certain conditions before the bank will approve the short sale, like paying for the cost of repairs.
Short Sale Considerations
Unlike a traditional home sale, wherein the buyers and sellers control the transaction, the lender controls much of the short sale process. The lender decides if the buyer’s price is high enough and if the seller’s financial hardship is extreme enough to authorize the short sale. This is understandable since it’s the lender that will take a loss on the sale. Also, the lender often pays many costs that are normally covered by the buyer or seller, including realtor commission, transaction fees, and other closing costs.
There could also be tax consequences associated with a short sale. The bank might agree to the short sale and to cancel the remaining balance on your mortgage. But you might owe taxes on the canceled mortgage debt. Luckily, you will only owe taxes if the canceled debt reaches a certain threshold. Under the Mortgage Forgiveness Debt Relief Act of 2007, canceled mortgage debts of up to $750,000 (or $375,000 for married couples filing individually) aren’t subject to federal taxes. However, this benefit is only in effect until 2025.
The Benefits Of Selling Your Home Before Foreclosure
There are several benefits to selling your house before the lender can foreclose on it. First, you’ll avoid having a foreclosure on your credit report. Most foreclosures will stay on a credit report for seven years and may negatively impact your ability to get a loan or secure housing moving forward.
Second, if you decide to buy another home, you can do so much sooner. For instance, prospective home buyers must wait three years after a foreclosure before they can apply for an FHA loan. Many banks and other lenders will be less likely to give you a mortgage if they see a foreclosure on your credit history.
Third, you can avoid a deficiency judgment. A deficiency balance exists if the proceeds from a foreclosure sale aren’t enough to pay off everything you owe under the mortgage. Some states allow the bank to recover this difference from you by securing a deficiency judgment.
Fourth, it may make it easier to sleep at night. Selling your home gives you a proactive way to do something about your situation instead of remaining at the mercy of your lender during a foreclosure.
What To Do If You’re Facing Foreclosure
Foreclosure is complicated, so the best thing to do when you’re facing one is learn what options are available. For example, you can talk to a local housing counselor who can explain your options. They know what programs are available and which might work for your situation. Additional options may include:
Deed in lieu of foreclosure: If you can’t sell your house, a lender may be willing to consider your mortgage loan fully paid if you give them legal ownership of your property by handing over the deed. If you choose to do this, you will lose your home but can avoid foreclosure.
Forbearance: This allows you to make smaller monthly mortgage payments, or no payments at all, for a specific period of time. If you qualify for the CARES Act forbearance, your forbearance period can be up to one year.
Reinstate the loan: Some states allow homeowners to reinstate a mortgage if they have the cash to make up all missed payments, interest, fees, expenses, and penalties.
Set up a repayment plan: A mortgage lender can help you set up a repayment plan to make up your missed mortgage payments. This repayment plan may last anywhere from three to nine months. They will likely require you to make these payments in addition to your current mortgage payments.
File bankruptcy: One of the biggest benefits of Chapter 13 or Chapter 7 bankruptcy is the automatic stay. This will temporarily stop a foreclosure action and most other debt collection activities.
Selling your home is one of the best ways to avoid foreclosure. But you’ll need to consider several factors before you decide how to go about the sale. These include how much equity you have in your home, your overall financial situation, and real estate conditions that could affect your home’s fair market value.
If you sell your home before foreclosure proceedings finish, you can do so with a short sale or a traditional real estate transaction. If neither is possible or if you’re looking for a solution that lets you keep your home, you have other options available, like bankruptcy, loan modification, and refinancing.