“Is selling a pre-foreclosure home possible?” That’s a question that we often get, and it’s one worth exploring before your foreclosure sale date. To better understand how a pre-sale foreclosure works, let’s dive into the fundamentals of foreclosure.
Foreclosure proceedings start after a homeowner default or fall behind on their mortgage payments. In essence, it involves the mortgage holder taking ownership of the property and selling it off to satisfy the outstanding debt.
What many homeowners don’t realize is that if the foreclosure sale doesn’t cover the debt the lender needs to recoup, they are legally able to sue for the difference. And they often do.
Besides the specter of a lender coming after you legally, homeowners who’ve been foreclosed on also face financial difficulties associated with bad credit. After all, a foreclosure can result in a steep credit score decline.
As you can see, allowing a property to be foreclosed on could put you in a financial hole that takes years, if not decades, to dig out of. It remains one of the most negatively impactful financial experiences that you can undergo.
Yet, if you’re burdened with a home damaged by a natural disaster, living in a neighborhood that’s rundown and crime-ridden, or tied to a house you can no longer financially support, your options may feel limited.
There’s nothing worse than living with the burden of an unwanted home.
What to Do When Foreclosure Looms
Fortunately, the writing doesn’t have to be on the wall should you face an impending foreclosure. First, you’ll receive a warning notice from your lender letting you know you’re behind on payments.
This notice will discuss impending foreclosure should you prove unable to bring your account current. At this stage in the game, you should try to negotiate a payment plan. Or, ask for a loan modification or a special forbearance.
Loan modifications involve extending the terms of your mortgage or refinancing the debt. This is done to reduce the mortgage payments you’re making every month so that you can financially recover while enjoying more affordable payments.
Special forbearance involves arranging a repayment plan that matches your current financial situation. It could include reduced payment amounts or even a temporary suspension of those payments.
Special forbearance is generally granted to those who’ve seen a recent increase in their living expenses or a decrease in their income.
To receive a special forbearance, you’ll need to furnish documentation indicating your ability to meet the requirements of the new payment plan.
Alternatives to Foreclosure
Other alternatives to foreclosure include a partial claim. In this case, you and your lender will make a claim to the FHA-Insurance fund to bring your mortgage current. This is a great option if you’ll be able to pay full mortgage payments thereafter.
If the alternatives above don’t apply to you, you can voluntarily give back your home to a lender with a deed-in-lieu of foreclosure. This doesn’t impact your credit score as negatively as a foreclosure. But it won’t save your home.
You also have the option of hosting a pre-foreclosure sale. A pre-foreclosure sale provides you with the opportunity to sell your property thereby satisfying your debt to the lender.
But what are the pros and cons of a pre-foreclosure sale, and will it ensure a better outcome? Let’s explore how it works and whether or not it makes sense for your situation.
What You Need to Know About a Selling a Pre-Foreclosure Home
A pre-foreclosure sale allows you to get more value out of your home to satisfy your lender. But you need to understand its limitations before deciding whether or not it’s the best option for you.
Pre-foreclosure sales can occur during the window of time after your lender notifies you of an impending foreclosure and before the actual foreclosure sale occurs. Why? Because you still legally own your property at this point.
Before proceeding with a pre-foreclosure sale, speak with your lender. Ideally, you want this sale to satisfy your debt in full. So, ask them to agree to the sale and forgive the remaining balance on your mortgage.
If you can come to such an arrangement, then even if you face a short sale where the property sells for less than what’s owed on the mortgage, you won’t have a future legal battle with you lender.
The advantages of a pre-foreclosure sale include your ability to move forward with a clean slate. A pre-foreclosure sale also has a far less negative impact on your credit score. But it’s not all roses when it comes to this solution.
A pre-foreclosure sale includes obvious cons such as being out a house. And although your credit score won’t be nearly as bad as it would if you’d gone through foreclosure, it’s hard to come out of a defaulted loan scenario unscathed.
Your credit score probably took a pretty good hit from late or missing mortgage payments before the sale. This could impact your ability to secure a new home loan. It could also make landlords wary of you as a tenant.
A Pre-Foreclosure Sale and Your Federal Tax Responsibilities
You also need to understand the tax implications associated with this alternative to a foreclosure. Remember that old saying, “Nothing is certain but death and taxes?” It proves no less true when it comes to a pre-foreclosure sale.
No matter how severe your recent financial challenges have been, Uncle Sam will still want his cut when selling a pre-foreclosure home. Period.
What does this mean for you? According to the US tax code, when somebody forgives you a debt, you have to report it as taxable income.
For example, if your lender forgives you $50,000 on your home loan as a result of a pre-foreclosure sale, you’ll have to claim that $50,000 as taxable income. This can lead to one hefty IRS bill.
While there are exceptions to this rule, they prove drastic and come with other financial implications that you may not want to face. Your options include bankruptcy, insolvency, and, in rare cases, the Mortgage Forgiveness Debt Relief Act.
The Mortgage Forgiveness Debt Relief Act of 2007 permits individuals to exclude income from forgiven debt on their primary house. But it only applies to properties with debt forgiven in calendar years 2007 to 2016.
In other words, if you opt for a pre-foreclosure sale, it behooves you to get the most money possible from a buyer. That means less debt your lender needs to forgive and fewer taxes come next tax season.
Selling a Pre-Foreclosure Home
At this point, you may be wondering. “How can I sell my house fast for market value?” The traditional home selling process comes with many hassles, is labor and time-intensive, and may not prove possible for every homeowner.
For example, property repair costs could prevent you from selling your home, especially if the next buyer is qualified for a picky FHA loan. FHA lenders may require thousands or tens of thousands of dollars in repairs that you don’t have.
A traditional sale also means listing with a realtor and facing regular walk-throughs from potential buyers. This could seriously impact your lifestyle and privacy. And it could tie up your property for many months as you wait for a buyer.
As you can see, selling a home in pre-foreclosure comes with advantages and disadvantages. It can save your credit score and protect you from future debt collection on the part of your lender.
But it can still negatively impact your credit. What’s more, the traditional process of selling a home can prove invasive, costly, and untenable in some cases. The costs of selling a home can often add up in ways you never foresaw.
Fortunately, you have the option of working with a cash homebuyer service. But these home buyers are sometimes known for nickel-and-diming homeowners during the inspection process. That is, unless you know who to work with.
Your Best Bet
Has your home become a burden? Do you detest the thought of living there a moment longer? If so, then contact the folks at St. Louis Realty Advisors to discuss selling a home in pre-foreclosure.
Unlike other homebuyers who lowball the residents they work with, we will negotiate a price that works for you. The homeowners we’ve worked with have felt satisfied with the final price they’ve received.
And we also prove a great option should you find yourself in the unenviable situations of receiving an inherited property that you need to liquidate.
St. Louis Realty Advisors are the #1 cash buyers in St. Louis and the surrounding. We purchase properties without requiring repairs, a long waiting period, or added fees. Call 314-270-1601 today to learn more about the process.