Definition
A pre-foreclosure sale involves the sale of property claimed as collateral in order to avoid foreclosure.
Analysis
A lender may allow a borrower the opportunity to sell the property rather than for normal foreclosure proceedings to commence. Borrowers often have as many as 4-6 months to sell the property.
The U.S. Department of Housing and Urban Development (HUD) may provide up to $1,000 to both the lender and the seller to encourage a pre-foreclosure sale rather than foreclosure. These funds may be used to pay real estate listing fees, repair the property and to market the property. The homeowner is expected to make an active effort to sell the property.
There are many eligibility requirements that must be met in order for a pre-foreclosure sale to be allowed. These include:
- Homeowner must occupy home as primary residence
- Mortgage must be at least 30 days delinquent
- Delinquency must be due to income loss or increased expenses
- Negative equity cannot exceed 63% of debt-to-value ratio
- Homeowner expects the sale price to be at least $1,000 below the loan balance
If the property happens to sell for more than the loan balance, the homeowner will not receive any payment from HUD. If the property sells for more than the loan balance, the borrower may keep the surplus. If there is a deficit (short sale), then the lender may have the option to forgive the deficient balance.
