Understanding Pre Foreclosure Negotiations

By: John Montgomery

An actual foreclosure occurs when a buyer defaults on their mortgage and forces the lender to reclaim and sell the property for the remaining balance or the current fair market value. A pre foreclosure, on the other hand, is a process that homeowners often use in order to avoid having their property fall into foreclosure. Many homeowners choose to consider a pre foreclosure sale in order to protect their credit rating, which would suffer greatly if a lender reported a foreclosure.

Under a pre foreclosure sale, the current owner will typically be able to accept less than the actual balance remaining on the property. For this reason, seasoned real estate investors often prefer to negotiate directly with the owner under a pre foreclosure offer. The process is understandably difficult for some sellers, who are forced to relinquish their home due to bad circumstances. Individuals are faced with foreclosures for a number of reasons, including illness, job loss, divorce, excessive debt or other situations that may prevent them from making future mortgage payments.

For investors, purchasing a foreclosed home can often be challenging, but successfully negotiating a pre foreclosure offer may be even more so. It is often recommended that investors considering making a pre foreclosure offer consult an attorney who specializes in the handling of real estate matters. Important considerations to factor in to the offer include the condition of the home, any necessary repairs and the fair market value for other comparable homes in the area. Before making an offer, most investors prefer to have a professional inspection completed in order to confirm any unknown or underlying problems that may be present with the property.

The process of finding a pre foreclosure is difficult, but not impossible. Word of mouth is one way of learning of impending foreclosures, but lenders and even realtors may also be able to shed some light on the subject.

Under the U.S. Department of Housing and Urban Development (HUD) guidelines, a homeowner may be able to qualify for a pre foreclosure sale if they are at least two months delinquent on their mortgage payments, can sell their house within three to five months and the lender obtains an appraisal that confirms the value of the home meets the current HUD program guidelines.

A pre foreclosure sale is often beneficial to the current homeowner for a number of reasons. As mentioned earlier, a homeowner who is forced into foreclosure will suffer significant damage to their credit, which may make it more difficult to obtain a loan in the future. Even if the hardship that lead to the foreclosure was temporary, future lenders may see this as a sign that the borrower is a high credit risk. As such, obtaining another mortgage may be a very tedious task that, if granted, may be accompanied by high interest rates and a larger down payment.

The information contained in this article is designed to be used for reference purposes only. It should not be used as, in place of or in conjunction with professional legal, financial and/or investment advice regarding pre foreclosure investments. For additional information, consult an attorney who specializes in real estate and/or financial matters.

Foreclosures
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