Buying Foreclosures the Pre Foreclosure Guide

Foreclosures are the financial epidemic of our time. There are many reasons that cause people to go into pre foreclosure. To name a few: divorce, layoffs, or change in income, illness, or death in the family. But, the one main reason for foreclosures today is because of creative lending programs. The banks and lending institutions have caused this. Many times the loans require little or nothing down, and have low teaser rates with an adjustable mortgage, and rates that shoot skyward after the initial period. There are already too many foreclosures, but this year promises to bring many more. The adjustable rates that were very low are now going up. What was viewed as a win/win situation by the bank and homeowner is now a lose/lose situation for both.

The first stage of foreclosure is pre foreclosure. Pre foreclosure is officially defined as the period from which the bank has notified the homeowner(s) that they are in default, until the moment the home is sold at auction. However, even before the bank has notified the owner of default, there has probably been some problem with making the payments on time. This period of time also is a pre foreclosure period. A smart homeowner will look into all available options at that time.

The length of time the homeowner has in this pre foreclosure period depends on the lending institution, and the laws of the state. The lending institution may decide it is time to act after two months of late payments, or maybe six months. Two to three months seems to be typical. The time length that the homeowner has in the pre foreclosure period is also dependent on the laws of the state the property is in. There are judicial foreclosure states, and non-judicial foreclosure states. To find out which type of state you are in, call the real estate department at your county court house. If you live in a non judicial foreclosure state, you can expect an average of about two months from the notice of default to the auction sale. Also a notice of sale is sent. This is often about the same time as the default notice. If the mail is misdirected or delayed, even if the lending institute failed to mail it at the proper time, the process still continues. In a non judicial state, the lender’s file on the homeowner’s mortgage goes to a foreclosure lawyer, hired by the lender. At that time additional fees, which are the attorney fees are added to the amount in arrears.

In a judicial state, the length of time a person can expect to be in the pre foreclosure time period averages about six months. The main difference is that in a judicial state the foreclosure goes through the court system. Getting a court date and having a representative of the lending institution present is what creates the longer time period. Additional fees also build up with judicial foreclosures, which have to be paid in order to bring the loan up to date.

During the pre foreclosure time and the period before pre foreclosure is official is when the homeowner should be talking to the lending institution.Calling the lender and talking to someone about your situation can be a dreaded, painful experience. But, it is less painful, than having your home taken from you when something could have been worked out. If you are honest with the representative, and keep promises you make regarding payments, you will find they will be very helpful.

There are several ways a home in pre foreclosure can be purchased. The homeowner is the legal owner of the property until the moment it is sold at auction.

Retail sale, with or without a realtor. This is reserved for a very good
condition property, with reasonable price, and in a seller’s market.

A sale, usually to an investor at a lower than normal market price, but
enough to cover loan costs, and charges.

A sale that catches up the amount in arrears, and any other charges, to
keep the home from being sold by auction, then the buyer gets a new loan to
cover the mortgaged amount.

A sale that involves catching up the arrears, then taking the property
“subject to financing”. This is making the monthly payments on the loan
until the home is re-sold.

A sale to an investor when the property has little or no equity can also be
done. The investor works with the bank in getting a “stay” or delay put on
the auction,and negotiates with the bank on an amount that is lower than
what is owed,to be the full pay off. This is called a short sale.

Another way the home can be sold, is by selling the home to an investor for
an agreed upon amount, then leasing back the home to the previous homeowner
for a certain amount of time. Caution should be used with this method,
there needs to be complete understanding by all parties, because the
homeowner no longer owns the home, but continues to live there.

Any of the above methods will save the homeowner’s credit, from the credit score plunge of a foreclosure. The credit report may just show a few late payments, then a pay off, or continued on time payments.

CAUTION: Before buying any property, but especially a pre foreclosure do a thorough title check first. All liens stay with the property, and must be paid. This includes second mortgages, lines of credit, tax liens, workman’s liens and so on. Also, the title check will be to make sure there are no clouds on the title concerning clear ownership.

This is meant as a guide only, and should be used as such, to make you aware of some of the particulars that go with pre foreclosure, or buying a pre foreclosure. You should seek legal advice for the state or county or country you live in. An investor should also seek advice and education from a real estate investment association in their area.