What Is a Pre-Foreclosure Sale?

by Paul Parsons

With the economy the way it is, foreclosure is a scary, frustrating word we are hearing more often. Foreclosure is a term used to describe a lawsuit between a business, home, or farm owner and a mortgage holder over a debt owed the mortgage holder. If a home or business owner fails to make mortgage payments, the bank or lender reserves the right to take over ownership of the property---an act to reclaim monetary losses by selling the property.

Significance

A pre-foreclosure sale is an agreement between a home, business, or property owner and the lender to accept a lower payment on the mortgage owed, if the property can be sold within a few months. The pre-foreclosure sale is an alternative to a foreclosure, and will potentially do less harm to a person's credit score than a foreclosure. When pre-foreclosure sales are successful, the home's former owners will be eligible to purchase a home or property within two or three years.

Considerations

Not all foreclosure threatened homeowners are eligible to attempt a pre-foreclosure sale. In order for a homeowner to sell their home through a pre-foreclosure sale they must meet one or more specifications. One specification is that a home or property's value must have dropped. Another sample specification is that the homeowner may not own any other valuable properties that could be sold as collateral.

Benefits

While avoiding foreclosure is especially beneficial to a homeowner, there are also many benefits of pre-foreclosure sales to potential homebuyers. Purchasing a home through a pre-foreclosure sale allows a potential buyer to receive discounts of up to 40 percent of the market value of a home. Other benefits when buying a pre-foreclosure home is that there is time to research properties, down payments are much smaller and sales agreements are easily customized.

Warnings

Pre-foreclosure sales are not as devastating to a person's credit score as undergoing a home or property foreclosure, however they still affect a person's credit, putting his ability to purchase big-ticket items on hold. Cons that potential buyers may face when attempting to purchase a pre-foreclosure home are: difficulty keeping in contact with the homeowner, negotiations with the homeowner and lenders and competition with other potential buyers.

Prevention/Solution

The best way to avoid a foreclosure or pre-foreclosure sale is to never miss a mortgage payment. Of course not many intentionally miss mortgage payments, so it is important before you purchase a home to completely understand the terms of your contract with your lender, and make the terms reasonable to your financial status. It is best to not promise to make payments that you know you will not be able to make each month or based upon hopes for a better future.

About the Author

Paul Parsons is a freelance writer, living in Houston, Texas. Parsons writes from an array of different topics, but specializes in medical, personal finance, computers and business.