When a property is in pre-foreclosure, the owner still has a chance to ward off a foreclosure by getting enough money to pay the bank or sell the property to pay off the loan.
“A buyer comes in and gets a home at a discount from the full market value without the house ever going on the market,” says Darren Blomquist, senior vice president at Attom Data Solutions, parent company of RealtyTrac in Irvine, Calif. “It can be a win-win situation for everyone.”
If they can do that, they can likely walk away with a little equity in the home and while avoiding a bad credit mark that comes with a foreclosure — a mark can last seven years.
“These went out of vogue during the housing downturn, but they have come back,” adds Blomquist. “There are fewer of them now. But since the housing market is on fire, people are looking for bargains.”
When I first started looking into buying a home, pre-foreclosure properties caught my eye as an affordable option. These distressed homes can sell for thousands below market value, making them enticing bargains for budget-minded buyers. However, I soon learned that buying pre-foreclosure comes with unique hurdles—especially regarding financing.
As a real estate writer, I researched the ins and outs of using a mortgage loan to buy a home in pre-foreclosure. Here, I’ll share everything I learned about getting financing to purchase a pre-foreclosure property.
Overview of Pre-Foreclosure Homes
Pre-foreclosure is the stage of the foreclosure process after the homeowner receives a notice of default from their lender, but before the home gets repossessed or sold at auction
-
During pre-foreclosure the owner has a window of time to reinstate their loan or sell the house to avoid foreclosure.
-
Most pre-foreclosure homes are not listed on the MLS yet but are in distressed condition. Selling prices are usually 5-20% below market value.
-
Buyers can negotiate directly with owners to buy a pre-foreclosure. But unique risks exist around title defects and loan eligibility.
Can You Get a Mortgage for a Pre-Foreclosure Home?
The short answer is yes—you can absolutely use a mortgage or other type of loan to purchase a home in pre-foreclosure. Conventional loans, FHA loans, and VA loans are all options if you qualify.
However, securing financing requires extra precautions to mitigate the risks involved with pre-foreclosure properties. Specific underwriting guidelines and appraisal procedures help ensure the lender can reclaim the home if you default.
Below, I’ll dive into key loan eligibility factors and tips for successfully financing a pre-foreclosure home.
Mortgage Eligibility for Pre-Foreclosure Homes
When underwriting a loan for a pre-foreclosure purchase, lenders scrutinize a few key points:
1. Clear Title
-
The title must be free of liens and other defects before closing. Title insurance protects the lender if issues emerge later.
-
It’s smart to have a title expert research the pre-foreclosure title upfront to uncover potential challenges.
2. Sufficient Value
-
The appraised value must support the purchase price and loan amount. But foreclosure can reduce appraised value.
-
Preparing comparables of sold distressed homes helps appraisers accurately value the property.
3. Occupancy Status
-
Fannie Mae requires the sellers to vacate the home before closing on a pre-foreclosure purchase.
-
For FHA and VA loans, sellers can occupy the home for up to 30 days post-closing in some cases.
4. Arm’s Length Transaction
-
The deal must be between unrelated parties acting independently for their own gain.
-
Buyers can’t have any existing financial ties or business relationships with the sellers.
How to Improve Your Chances of Loan Approval
As the buyer, you can take proactive steps to increase the likelihood your lender will finance the pre-foreclosure purchase:
-
Review title documents – Spot and resolve any issues immediately
-
Hire an agent – Their expertise navigates the complex pre-foreclosure process
-
Propose a post-closing rental – Sellers may accept a lower price if they can rent the home back for a short period
-
Provide ample down payment – At least 20% down shows lower risk for the lender
-
Get prequalified – Confirms you can afford the monthly payments
-
Make a strong offer – Include an inspection and appraisal contingency with earnest money deposit
-
Research comps – Helps the appraisal reflect the property’s true value
Types of Loans Available for Pre-Foreclosure
These standard mortgage programs can provide financing for pre-foreclosure purchases:
Conventional Loans
Popular with buyers who can afford a 10-20% down payment and meet minimum credit score requirements.
FHA Loans
Offer low down payments and more flexible credit standards. Sellers can stay in the home up to 30 days post-closing in some cases.
VA Loans
Ideal for military buyers. The VA guarantees 100% financing with no down payment required. Sellers may be able to occupy the home temporarily after closing.
USDA Loans
Provide zero-down financing for low-income buyers in rural locations. Credit standards are also lenient.
Renovation Loans
FDIC-insured renovation loans combine the mortgage with funds for repairs in one loan. An ideal choice for fixer-upper pre-foreclosure homes.
Mistakes to Avoid When Financing a Pre-Foreclosure
As a pre-foreclosure home buyer, steer clear of these common missteps to ensure your loan sails through underwriting:
-
Assuming all financing programs will approve a pre-foreclosure purchase
-
Attempting to arrange seller financing—it likely violates the mortgage lender’s terms
-
Skipping inspections that could reveal deal-breaking defects
-
Letting sellers continue occupying the home after closing
-
Accepting a sale price significantly above market value
-
Omitting contingencies for financing, appraisal, and title searches from your purchase offer
-
Falling for scams listing fake pre-foreclosure properties online
How long do people have before foreclosure looms?
After a certain number of months of not paying the mortgage, lenders can begin foreclosure procedures if no agreement can be made. That means that the first public notice will be in the form of a Notice of Default. This is a public record, and that’s how people find out about pre-foreclosure homes.
The timespan of how many days a homeowner has before the proceedings begin varies from bank to bank. But new laws after the housing collapse give people a standard of 120 days.
“During this whole time, hopefully, lenders are talking to the homeowners. They want to help them get on track again,” Blomquist says.
It varies from state to state after the notice of default of when the home will go up for public auction. Texas has the shortest time and can be as quick as one month. New York and New Jersey have the longest period of six months to a year.
“However, those are averages. Those auctions can be postponed many times,” he says.
How does a home enter into pre-foreclosure?
Unfortunate life circumstances can cause anyone to fall behind on mortgage payments, Blomquistsays.
“It’s different these days from when people just got bad loans and got in trouble during the mortgage crisis. Now, the common reasons are death, divorce, and loss of job. These can disrupt lives,” Blomquist explains. “These aren’t people who just forgot to pay the mortgage month after month.”
HOW to buy pre-foreclosures Subject To before auction
Can you buy a house in pre-foreclosure?
If the owner can’t cure the default and get the loan back into good standing, the only way to avoid foreclosure is to sell the property before the mortgage holder takes it away. Buying a property in pre-foreclosure involves approaching the owner — usually before the property is listed for sale — and offering to buy it outright.
What does it mean if a home is pre-foreclosure?
What Does It Mean If a Home Is “Pre-Foreclosure?” A pre-foreclosure home is a distressed property that the lender has not yet repossessed and sold at auction. Pre-foreclosure homes are generally still occupied by their owners, who have fallen behind on monthly mortgage payments.
What happens if you buy a pre-foreclosure property?
Read more about buying a pre-foreclosure property. If the owner can’t manage to hang on to the property, it will probably go up for sale in a foreclosure auction next. Successful bidders usually have to pay in cash at the time of purchase, and there’s not much time or opportunity to research the property beforehand.
When is a home in preforeclosure?
Preforeclosure is the first step in the foreclosure process, and it occurs when the homeowner has failed to make 3 – 6 months’ worth of mortgage payments. How do I know if my home is in preforeclosure?