Buying preforeclosure homes can be a highly profitable real estate investing opportunity. If you invest in preforeclosure home, however, (or if you plan to), you need to understand the other options that a homeowner who is currently in preforeclosure or who is facing foreclosure may be considering.
Forbearance Agreement – A homeowner who is in default, but not yet in preforeclosure, may be allowed to make low mortgage payments or no payments at all for a period of time (commonly 3-6 months). After that period of time, however, the homeowner is usually required to make payments that are higher than the original monthly mortgage payment until the loan is brought up-to-date.
Special Forbearance – If the homeowner has an FHA loan, he may be eligible to postpone making mortgage payments for a minimum of four months to avoid lapsing into preforeclosure. There is no limit to the number of months the homeowner may postpone payments, but payment delinquency is not permitted to exceed the equivalent of 12 monthly PITI installments.
Short Sale – This has been a popular way for homeowners to rid themselves of a home they cannot afford. Technically, this is not a way for homeowners to keep their home. It is a way for the homeowner who is in preforeclosure to let the bank allow a sale of the home for less than its value. In recent years, more and more homes have been allowed to go the short sale route. In 2013, the general real estate market has improved throughout much of the U.S. Less and less homes are “underwater” (meaning the homeowner owes more against the house than it is worth) and banks are becoming less willing to allow short sales.
Loan Modification – Homeowners can avoid preforeclosure with a loan modification, which changes one or more terms of their mortgage. It is difficult for a homeowner to be granted a loan modification, though, unless there are justifiable reasons, such as extreme hardship.
Reinstatement of the Loan – A reinstatement loan allows a homeowner whose property is in preforeclosure to avoid foreclosure auction by paying the lender a lump sum payment that includes missed payments, late fees, legal fees, foreclosure costs, and all principal owed during the period of preforeclosure. In short, this means that the homeowner has caught up on all missed payments and late penalties. If the bank had already hired a foreclosure attorney, then the homeowner would also be required to pay the attorney’s fees up to the point the foreclosure proceedings were stopped.
Repayment Plan – Homeowners whose properties are in preforeclosure may make a written agreement with the lender to make higher monthly mortgage payments than the regular monthly payment amount until the mortgage is no longer delinquent.
The above are commonly considered alternatives for homeowners who want to avoid foreclosure, or who want to avoid losing their home at a foreclosure auction. Understanding the pros and cons of each will help prepare you for your negotiations with a homeowner who is in preforeclosure, or who wishes to avoid reaching the state of preforeclosure.