Buying a Pre-Foreclosure Home: What’s It Like?

Foreclosure is a mortgage lender’s legal repossession of a home in order to sell it and get back the balance of the unpaid home loan.

Pre-foreclosure, as you might guess, is that window of time when a homeowner has fallen behind on their monthly payments, but the mortgage lender has not yet repossessed the home.

The struggling homeowner still has time to head off foreclosure. During this brief grace period, the homeowner may be able to sell the property for a price that’s enough to satisfy the lender.

At the same time, pre-foreclosure may give a hopeful buyer the chance to scoop up a home for an affordable price.

Finding a Home in the Pre-Foreclosure Stage

Find pre-foreclosures through your county’s public records, under the notices of foreclosures and sales. The key terminology: Notice of Default (NOD) or Notice of Lis Pendens (NLP). They appear in the records because the lender needs to file a formal notice with the recorder’s office in the home’s county. Some counties have placed these records on their websites. You’ll find a number of online information sources about pre-foreclosures. A well-known one is the Zillow® site. Some multiple listing services include pre-foreclosures. (Expect some leads to fizzle out. Owners sometimes find ways to clear their past-due debts.)

Real estate professionals know things. Brokers, attorneys at title companies, agents that know their way around tax sales, unlisted properties, and foreclosed homes for sale to first-time home buyers… All of these people are good sources. They might know about distressed properties before the internet does. 

Agents will sometimes be asked to list a home during the pre-foreclosure period. A clued-in agent can help you find a home, check into the condition and occupancy status of the home, assess the home in terms of fair value, and help you move all the way to closing. Or you can hire a real estate attorney to review the contract, let you know of any concerns, and get you through closing.

Now, gather up your patience. The pre-foreclosure period can go on from a few months to a year or so.

Can hiring a real estate attorney rather than a real estate agent save you money? Learn more with Deeds.com.

Understanding the Seller’s Situation

In these situations, the homeowner has been notified that they have missed too many mortgage payments and are now in pre-foreclosure.

It’s important to know what this seller is experiencing. This is because a buyer of a pre-foreclosed home will have an opportunity to work with the seller. A buyer may find this simpler than dealing with a home that’s already being auctioned off, or one that’s bank-owned. For people who buy bank-owned (“REO”) real estate, there’s less room for negotiations and inspections, and more competition from experienced, all-cash investors.

There is, in short, a very human aspect to pre-foreclosure. You’ll be negotiating, so it’s helpful to try to see the situation from the homeowner’s viewpoint. The homeowner who is experiencing pre-foreclosure has some say over how everything plays out and is generally looking for the best actions to maintain a viable credit profile.

A well-prepared offer, pre-approval, and common decency can lead to a helpful outcome for you and the homeowner. This person may consider low-ball offers, just to dodge the hit to their credit profile that foreclosure creates. This can give the buyer financial resources to renovate the home—and the home might well be in need of repair.

On the other hand, some homeowners in the pre-foreclosure period aren’t happy about having to sell. Some may be looking at other ways to deal with their financial stress or are still talking things through with the mortgage company. So, it’s unhelpful to contact a homeowner with the assumption that they want to sell.

The Agent Calls It a Short Sale. What’s the Story?

Homeowners with equity still in the home may be able to pull off a regular sale. You’ll put your offer in, negotiate the deal, and sign a purchase contract.

But some homeowners are underwater. That is, they owe more on the loan than the home is presently worth. In this case, the struggling homeowner might ask the lender to approve a short sale. It’ll then be up to the lender whether or not to accept your offered price.

It’s fairly common for pre-foreclosure to lead to a short sale. This means the mortgage company is letting the borrower sell and pay back less than the complete outstanding loan balance. The company writes off part of the debt, and the borrower’s credit profile avoids the full blow of foreclosure.

Your real estate professional can collaborate with the seller in this situation. The lender will expect specific financial documents. One of them is a short sale hardship letter that explains why a short sale is the only recourse available for the seller and the best option for all parties.

You, as the buyer, will prepare a purchase offer that takes into account the condition of the home, the need for the sale, and your readiness to buy. This should be submitted together with a pre-approval from your lender and/or proof of your available funds.

Speaking of funds, if the home needs repairs, consider applying for a renovation loan, like an FHA 203(k) or a rehab loan. You’ll want to know if the seller will permit you to have a professional inspection done. The inspector’s report will indicate just how much funding you’ll need to cover the necessary work. As you can see, getting the mortgage that suits a pre-foreclosure home will take situation-specific planning.

Title Tribulations?

Title company professionals carry out the pre-foreclosure home’s title search. They check for unresolved liens, which could indicate construction debts, unpaid tax bills, or second mortgages. They search for court orders against the homeowner and any liens imposed by homeowner associations. A real estate lawyer at the title company could have to get into the weeds and resolve past issues.  

You can buy a property with mortgage liens still recorded against it. Some investor-buyers are used to this. But then, they resolve the liens through escrow before the next buyer takes the deed. Or they find buyers who agree to take the deed “subject to” the mortgage lien. Otherwise, they risk losing the deed to the lender that imposed the lien.

Your lender will issue your final approval once your finances and the home’s title are in an acceptable state for your lender’s underwriter. Your lender will order the home appraisal and shepherd you through any loose ends. You’ll set up a transfer of funds with your bank. Then you’ll get to closing. As expected, you’ll be signing a stack of documents, writing checks out, and having your new deed recorded.

Nice job!