What is Pre-Foreclosure

Pre-foreclosure typically begins when a homeowner receives a Notice of Default from his or her lender. The Notice of Default is the first required step to be performed by the lender to initiate the foreclosure process.

During preforeclosure, a borrower has several options to avoid foreclosure such as:

          Selling the home

          Short Sale

          Filing Chapter 13 bankruptcy to repay arrears

          Refinance/Loan modification

          Deed in Lieu of Foreclosure

          Sale/Leaseback

 Foreclosure timing

Preforeclosure is a term used to identify the time period prior to the sale of a home at a foreclosure auction. It can begin at the first missed mortgage payment and runs until the home is auctioned by the foreclosure trustee.

The sale of a home at a foreclosure auction cannot occur before 190 days from the date of the first missed mortgage payment. Additionally, a series of notices must be recorded in the county auditor's office. Notice must also be delivered to the homeowner/borrower, lenders and lienholders; and the sale must be published in a newspaper in the county where the property is located.

The first notice required to be delivered is called the "Notice of Default". After receiving the Notice of Default, the borrower has 30 days to bring all mortgage arrears current.

If the borrower is unable to bring the mortgage arrears and late fees, attorney's fees and other costs current within 30 days after receiving the Notice of Default a foreclosure trustee (usually attorney or title insurance company) delivers a Notice of Sale. The Notice of Sale provides the borrower with notice that the property will be sold at public auction at a date not less than 90 days from the date in which the Notice of Sale is delivered if the borrower is unable to pay all mortgage arrears within 11 days of the foreclosure sale date.

To illustrate, here is a timeline of notices and time periods in the pre-foreclosure process:

Notice of Default___30 days___ Notice of Sale___90 days___ Foreclosure Auction*

*190 days must have expired between the first missed mortgage payment and the foreclosure auction.

 Selling a home in pre-foreclosure

The first step in selling a home in foreclosure is to determine the total balance owed to your mortgage lenders.

If you have received a "Notice of Default", you should contact each of your mortgage lenders to request (in writing) what is called a "pay-off" balance.

If you have received a "Notice of Sale" and your home is set for auction, then you must contact the trustee, who is the third party conducting the auction (the name and contact information for the trustee can be found on the Notice of Sale).

Please note, if only one mortgage is being foreclosed upon, you must contact the non-foreclosing lenders directly because the trustee does not have any information on other loan balances.

Also, if you have other encumbrances against the title to your home (such as judgments or tax liens), you must contact the creditor or governmental agency that maintains the lien in order to obtain an updated pay-off balance.

The pay-off balance is the total amount that you owe the lender, creditor, or governmental taxing agency.

The pay-off balance includes but may not be limited to: the principal balance of the loan or debt, accrued interest, late fees, attorney's fees and penalties.

Once you have determined the total pay-off balance, the next step is to consult a realtor to obtain a "Comparative Market Analysis" (also called a CMA). A CMA sets forth comparable home sales in your neighborhood to provide insight as to the value of your home.

After obtaining the CMA, the third step is to compare the pay-off against the CMA to determine if any equity exists in the home. If you have sufficient equity in your home, you may not need to obtain lender permission prior to selling.

If you have little to no equity, you must obtain lender permission prior to closing a home sale. Lender permission is required when the sale of the home does not generate enough money to pay off one or more mortgage loan.

This is called a short sale.

The procedure for obtaining lender approval is to submit a buyer's offer along with a hardship application (obtained from the lender) and letter describing the circumstances leading up to the foreclosure and short sale to the lender's loss mitigation or other designated department with authority to make a decision on a short sale.

Be careful, oftentimes homeowners and real estate brokers fail to contact the appropriate department and lose valuable time in getting their offer approved by the lender.

When negotiating with the lender on a short sale, there are several important legal issues that must be negotiated. For example, if the lender will take a loss on a mortgage loan, the real estate broker or homeowner should negotiate a formal agreement with the lender forgiving any debt remaining after the short sale.

When executing a short sale, it is imperative that the homeowner or real estate broker fully discloses the fact that all offers must be approved by a lender prior to acceptance.

If a homeowner is dealing with a real estate broker inexperienced in short sales, the homeowner risks not only a large debt remaining after the sale but also potential civil liability for fraud if the homeowner is unable to deliver clear title to a potential buyer.

 Buying a pre-foreclosure property

A sophisticated pre-foreclosure buyer gains a significant financial advantage from his or her knowledge on how to negotiate a pre-foreclosure purchase.

Buying a pre-foreclosure property is as much about knowing the process as it is about establishing rapport and keeping in communication with the lender of a pre-foreclosure property.

When considering a pre-foreclosure purchase, the first step is to research the property.

When researching the property, you should obtain a full or preliminary title report and research appropriate county and local records . This will provide you with information on all encumbrances against the property that may or may not have to be paid prior to the closing of your purchase.

However, be advised, certain liens, judgments or other encumbrances not appearing on your title report may appear after your initial title report review. Thus, we recommend you develop a professional relationship with a title insurance officer who can monitor the property title throughout the buying process.

After conducting research on all sums owed by the homeowner, the next step is to contact the real estate broker selling the property, or if the homeowner is not represented by an broker or attorney, the homeowner directly.

When contacting a homeowner directly, it is important that you are compassionate toward the homeowner as a foreclosure is usually triggered by a significant life changing event such as: divorce, job loss, injury/illness, or a failed business venture. As such, pre-foreclosure property owners are not only reeling from the unfortunate event but are also facing the loss of their most valuable asset.

In the event your discussions with the broker or homeowner prove fruitful, the next step is to contact all lenders or creditors who will receive less than the amount due and owing to discuss how much the lender/creditor may be willing to accept in a short sale.

When contacting the lender, make sure you are speaking to someone with authority to approve a short sale and keep in contact with this individual throughout the purchase process.

After discussing the short sale with all lenders/creditors, the third step is to submit an offer.

When making an offer to purchase any real estate, we recommend you employ a broker or attorney to prepare your written offer or that you consult a qualified professional to obtainr advice on how best to protect your financial interests in the transaction.

If the property is a short sale, it is also important to retain a broker or attorney experienced in short sales.

One important thing to consider when making an offer on a short sale is to make the offer and earnest money deposit contingent upon lender approval of your offer.

Other contingencies such as financing, feasability and inspection should also be considered when making an offer on a short sale property.

Once the lender approves your offer, be sure to keep in contact with both the seller and the lender/creditor to report progress on contingencies and to submit all required documents within the prescribed time periods.

A broker or attorney experienced in short sales will smoothly navigate you through this sometimes difficult and time consuming process.

To this end, you will only pay an attorney for his or her time because the real estate broker is not paid by you, rather by the seller or lender benefitting from the sale.

 Judicial v. Non-judicial foreclosure

In the state of Washington, a lender is not required to go through the court system when foreclosing a residential mortgage.

Because Washington requires residential lenders to utilize a deed of trust, rather than a traditional mortgage, the foreclosure process is performed by a "trustee" issuing a series of notices prior to the public auction of the property instead of filing a foreclosure lawsuit.

When obtaining a home loan in the state of Washington, the homeowner signs a promissory note and deed of trust.

The promissory note contains a promise by the homeowner to repay the amount of money borrowed over a certain period of time (i.e. 10, 15 or 30 years). The lender secures the promise to pay by imposing a lien on the home by requiring the borrower to sign a deed of trust.

The deed of trust appoints a "trustee" to ensure that all terms of the deed of trust are complied with by the borrower. The sale clause authorizes the trustee to issue notices then hire an auctioneer to sell the home at public auction.

The trade-off for this relatively fast sale period is that the foreclosing lender cannot obtain a "deficiency judgment" against the foreclosed homeowner.

A deficiency judgment is a monetary judgment obtained by a lender in court that represents the difference between the proceeds received by the lender at foreclosure sale and the actual amount due and owing on the home loan.

For example, if a lender forecloses on a $300,000 home loan debt and receives only $275,000 at the foreclosure sale, the lender may not pursue the homeowner for the $25,000 deficiency remaining after the foreclosure sale.

However, please note, if a non-foreclosing lender is not paid in full out of the foreclosure sale, the non-foreclosing lender may obtain a deficiency balance against the homeowner.

On the other hand, a traditional mortgage requires the lender to file a lawsuit. Because the homeowner actually owns the land (unlike a deed of trust where the lender appears on title) in a traditional mortgage state (New York, Connecticut & 8 other states).

In addition to being able to protect their home in court, a homeowner also has 1 year following the foreclosure auction to "redeem" the property.

Thus, for the homeowner desiring to save his or her home, the main difference between a deed of trust and mortgage is the amount of time it takes to actually sell the property.

To this end, the average number of days to sell a home in foreclosure in New York City is 445 days, while the average number of days to sell a home in foreclosure in Seattle is a mere 243 days.

As you can see, a deed of trust is a much better option for lenders than a traditional mortgage loan.

 More Information

To contact an attorney/real estate broker experienced in representing buyers in short sale transactions, you may reach us at: (206) 442-9500 (Toll-free: 1-800-206-6122).

To receive a free consultation regarding your (or your friend or family member’s) debt problems, please contact us today.