Can You Sell a House in Foreclosure?
The prospect of facing foreclosure can be terrifying for many homeowners. Not only do you end up losing your home where you've built your life so far, it also leaves a black mark on your credit report, making it hard for you to secure new loans with ideal interest rates. A foreclosure on your record can also make it difficult for you to get a job or find somewhere to rent.
However, no matter how much you try to avoid it, you might end up in a dire financial situation due to loss of a job, costly medical treatments, sudden death in the family, or other adverse circumstance, with the end result that you can no longer afford your mortgage payment and your lender starts foreclosure proceedings against you. You're riddled with uncertainty and you wonder if there's a way out of this situation without tanking your credit.
You might be thinking: "If I sell my home, would it solve my problem?"
Selling your home is complicated enough, but selling it with the threat of foreclosure hanging over you, it can add a layer of complexity and emotional distress.
You may not be able to think clearly and make decisions wisely, so we came up with this guide to walk you through the process and help you out.
What is foreclosure?
Foreclosure is a legal process in which a lender, typically a bank, takes back ownership of your mortgaged property and sells it in order to recover the amount owed. The process is initiated when you fail to make good on your monthly payments.
Mortgage lenders won't start the foreclosure process just because you're a day or two late on your monthly payment. While this could result in tense phone calls and emails and you could be slapped with late fees, your lender can't legally force you out of your home in an instant.
The foreclosure process can only start if you're 120 days behind on your payments. This gives you plenty of time to get caught up and avoid foreclosure entirely.
The length of the foreclosure process--from the issuance of the foreclosure notice to the end--depends on the state you live in, but the national average sits at 917 days or around 2.5 years. Because it takes an incredibly long time to complete, foreclosure is typically a last resort for mortgage companies since a foreclosure home tied up in litigation is not generating any money.
The process varies from state to state but generally, when you miss a payment, the lender sends out a notice informing you that the month's payment hasn't been received. Miss another, and they'll send you a demand letter--much more serious, but if you reach out to your lender, they'd still be willing to work out a solution on how you can catch up on your missed payments.
However, if you haven't done anything about it after 90 days have passed, you will receive a notice of default and your case will be handed off to your lending institution's or bank's foreclosure department. You now have 30 days to settle your mortgage payments before the bank forecloses on your property.
Home Sale by Foreclosure Auction
Ultimately, the goal of a foreclosure process is for the lender to recover its losses in a mortgage loan. If you're unable to settle the amount owed, or, at the very least communicate with your lender regarding possible solutions to the predicament you're in, then they would have no choice but to sell your home.
Lenders can sell your home by doing a foreclosure auction. Usually, the minimum bid is the amount owed on the foreclosure home, after which the house will be sold to the highest bidder.
After your house is sold in a foreclosure auction, you will be required to vacate the property and turn over ownership to the new homeowners.
Is There a Way to Stop the Foreclosure Process?
Foreclosure, per se, or the actual seizure of your home by the lender, is the final step at the end of a lengthy process.
Most mortgage companies will contact you and are willing to make arrangements to make it easier for you to pay. However, other lenders wouldn't be as proactive. You'll only receive a Notice of Sheriff's sale if you fall too far behind on your payments. Even so, there are still routes you could pursue so you wouldn't lose possession of your home.
Get Current on Your Mortgage Payments
Sometimes you may have simply let the due date slip by, or you may have a sudden expense which threw your monthly budget off-kilter--happens to the best of us, right?
Simply catching up on all your missed payments and possible late fees would prevent your lender from starting foreclosure proceedings against you. If the setback is temporary, you can consider borrowing from friends or relatives to tide you over. You can also sell other assets to cover the shortfall.
Talk With Your Mortgage Company Regarding Loan Modification
When you take out a loan to acquire a real estate property, your lender will provide you a mortgage contract outlining the terms of your loan such as the payment period, interest rate, and the monthly payments you have to make.
In case of financial hardship, you can request your lender to adjust the terms of your loan so you can still continue to pay and catch up on your missed mortgage payments. This stops your loan from going into collections and your home from getting repossessed.
To be able to modify your loan, there are certain requirements to be met such as a divorce, a medical emergency, sudden unemployment, and loss of a business. A good credit rating can also help you obtain a favorable loan modification option.
Here are a some loan modification options open to you:
- Reduction of principal: you can seek financial relief by asking your lender to reduce the principal instead of pursuing foreclosure
- Convert your variable-rate mortgage to fixed-rate: plenty of homeowners get enticed with low interest rates for variable-rate loans. However, it could easily get out of control throughout the life of the loan, almost always outpacing the fixed rate loans offered. Requesting the switch to a fixed-rate loan can make it manageable for you.
- Extend your loan term: requesting an extension of your loan term can reduce the monthly amount you have to pay. However, you'll likely pay a higher interest rate, thus, and thus you end up paying more money eventually.
- Postpone your payments: if you're going through a rough patch, you can simply ask to pay at a later date.
Refinance Your Mortgage Loan
Another way of halting the foreclosure process is by refinancing your mortgage. Unlike loan modifications, refinancing pays off your existing mortgage and replaces it with a new one.
By refinancing, you can have a shorter payment term (30-year term into a 20-year term) and a lower interest rate, or convert some of the equity you have built up over the years into cash.
If you go this route, you can reduce your monthly amortization into something more manageable.
Do a Short Sale
If loss of income has left you unable to keep up with mortgage payments, and there's no possible foreseeable recovery for you in the near future, you can consider doing a short sale.
Simply put, short sales are selling your property "short", meaning selling the house for less than the amount that is owed. But, why would your lender agree to accept less than the full balance? Foreclosure is a drawn-out and expensive process, and oftentimes, can even cost the lender money, so, in order to avoid this, most lenders would be willing to agree on a short sale.
A short sale absolves you of your debt, allowing you to walk away from financial distress without tanking your credit.
One thing to remember though, if you sell your house short, it can have tax implications. For example, you owe $250,000 on your home, and the lender agrees to a selling price of $200,000, thereby forgiving your remaining balance of $50,000. The IRS would treat this canceled debt of $50,000 as income, and for someone who is already struggling financially, finding out that you owe federal taxes on top of it might make the prospect of a short sale unpalatable.
Deed-In-Lieu of Foreclosure
Also known as friendly foreclosure, this is an arrangement wherein you willingly relinquish ownership of your home to the lender in order to avoid foreclosure.
It is recommended for homeowners with little or no equity since this means giving up on all rights to the property as well as whatever equity that has been built up over the years. If you consider going for this option, you can also negotiate with your mortgage company for assistance in relocation expenses (e.g. "cash for keys").
If you were unable to take advantage of the above options to halt the foreclosure process and the foreclosure sale date is just days away, there's one recourse left to you to stop the process in its tracks: file bankruptcy.
Once you declare bankruptcy, an automatic stay is ordered on your property, keeping it out of foreclosure. What would happen next depends on the type of bankruptcy that you file. In this case, a Chapter 13 bankruptcy will allow you to develop a repayment plan to service your debts within 3-5 years.
In any case, it would benefit you to reach out to a bankruptcy law firm. Having an attorney client relationship with a lawyer will help you figure out the best option to go with.
Short Sales vs. Foreclosures: Which Is Better for Your Credit Score?
While both may have a negative impact on your credit history, you'll be able to recover faster if you choose to short sell rather than get foreclosed on.
If you get foreclosed on, it would stay on your credit report for 7 years. When there's such a thing on your record, most lenders would be very wary of giving you a loan so it would be tough for you to secure credit. It would take around 3 years of on-time payments before you'll be able to repair the damage to your credit score--and approximately 7 years before you can fully recover.
On the other hand, although a short sale will be on your credit report for about the same time (7 years), you'll be able to rebound much faster--in about 2 years. This allows you to re-enter the housing market much sooner so you can start rebuilding your life. You can further speed up your recovery by making timely bills payments which would enhance your creditworthiness.
In summary, only time will be able to completely remove either of these two from your credit history. However, a key difference between them is that in a short sale, you're a partner to your lender in the proceedings.
In a short sale, you can negotiate for terms where it would be beneficial for you and the lender in the grand scheme of things.
In a foreclosure, you wouldn't have this option and the lender could secure a deficiency judgment against you, making recovery from this financial hardship tougher.
Is There an Advantage to Selling Your Home Pre Foreclosure?
Possibly the biggest advantage of selling your home in pre foreclosure is avoiding a negative mark on your credit.
Additionally, acting quickly in pre foreclosure allows you more time and control over the process, so you wouldn't easily be pushed into accepting a short sale.
If you sell your house early on, not only does it provide you a quick and graceful exit from your predicament, you might even be able to make some money from the sale.
Ways to Sell Your House in Foreclosure
So, you have chosen to sell your home to get ahead of the foreclosure process, thinking you'd move somewhere more affordable.
Well, how do you sell your home?
Here are the avenues open to you: a traditional home sale via a real estate agent or selling by yourself (FSBO); or, a fast home sale by seeking a cash offer from real estate investors.
Real Estate Agent
If you'd like to reach the widest pool of home buyers, then you can consider working with a real estate agent. There are realtors that specialize in pre foreclosure home sales who can guide you from staging to negotiating to closing.
However, you must keep in mind that in a foreclosure, you may not have the luxury of time. Selling your home with a real estate agent can take approximately 3 months from listing to closing, which may not be workable in your situation. Additionally, you'll need to pay their fees after the sale, which can be substantial, given the financial difficulty you're currently facing.
For Sale by Owner (FSBO)
If the above option doesn't sound good to you and you want to do away with the hassles and the fees of working with realtors, then you can sell your home yourself.
Called For Sale by Owner, or FSBO (and pronounced "fizz bow"), this option gives homeowners like you, full control over the home sale process.
In this case, full control also means full responsibility, so instead of having someone doing all the legwork of stagings, showings, negotiating, and closing on your house, that falls to you.
Furthermore, as sales rely on casting the widest net among prospective home buyers and it's only you who'll be doing the marketing, you should consider the possibility that your home might languish in the traditional market and take you a long time to sell.
If you feel like you aren't cut out for it, it would naturally lead you to wonder if there is an easier way to sell your home. Fortunately, you can always find a...
Since foreclosure is a time sensitive process, you'd definitely want a quick sale. Moreover, if a foreclosure sale date is looming on the horizon, then selling your home to a cash buyer can be your best bet.
Cash buyers such as real estate investors and house flippers specialize in purchasing distressed property. They're constantly on the lookout for these types of properties and homeowners needing a bailout. This qualified buyer has a substantial war chest to back up their cash offer and can close fast--sometimes in a week or less, since they're not waiting for approval from a mortgage provider.
Sure, you might sell for less than the market value, but with the time saved and certainty of the sale provided by a cash buyer, this can give you priceless peace of mind so you can move on with your life as soon as possible.
Tips and Things to Consider When Selling Your Home in Foreclosure
Don't Wait to Sell
The moment you receive a notice of missed payment, the worst thing you can do is to do nothing.
Gather all financial information regarding your situation: if you're looking at a long-term financial difficulty rather than a short-term dip in your income, then selling your home might be the best option.
Determine the Market Value of Your Home
You can network with a real estate agent or conduct a comparative market analysis yourself--that is, looking at the prices of similar recently sold real estate properties in your neighborhood--in order to set an asking price for your home.
Even though you're facing foreclosure, that doesn't mean you don't deserve to get a fair price for your house.
Factor in the remaining balance on your mortgage as well as all closing costs and you'll be good to go.
Keep in Touch With Your Mortgage Lender
Communicating with your lender can certainly help you avoid foreclosure.
Foreclosure costs money to the lender, and the hassle may not be worth it for them. Banks or retail lenders are in the business of lending money, not real estate, so it is in their best interest that you keep making your monthly payments.
Final Thoughts: Selling Your Home in a Foreclosure
Even though the foreclosure process has been initiated, there is nothing to be scared of. There are plenty of options available to homeowners: from loan modification, to refinancing, to a short sale, and much more. You should know that a notice of default is not a cause for despair, as you can always sell to a cash buyer, staving off the threat of foreclosure entirely.
Here at House Buyer Network, we're committed to helping homeowners who are struggling financially get out of the situation they're in. We have a vast network of cash buyers familiar with the local real estate market wherever you may be, so you can be sure to get a fair and honest offer for your house.
If you'd like to get our quick, no obligation cash offer, fill in your property location, phone number, and email in our form below.
Got questions? Feel free to reach us at (855) 835-2544!