When a borrower has reached an impasse as it pertains to their ability to pay their mortgage, lenders may entertain the option of a pre-foreclosure sale. In order to consider this option, the lender should first entertain other loss mitigation options and ultimately find these options to be impractical when taking into account the totality of the borrower’s financial distress.

The proceeds from a pre-foreclosure sale satisfy the mortgage debt in full even if the proceeds are less than the amount owed. Moreover, if the sale is completed within a required timeframe, the borrower will receive a cash payment of up to $1,000.

eligibility:

• borrower must submit an application;
• borrower must get HUD permission to conduct the sale;
• as-is appraised value must be at least 63% of the total amount due;
• borrower must have negative equity;
  • *negative equity – appraisal indicates the property value is less than 100% of the outstanding mortgage balance, including any partial claim amounts.
• net sales price must be at least 84% of the as-is appraised value;
• the loan must be at least 30 days in arrears;
• borrower will be given 4 months to sell UNLESS:
  • lender scores in the top 25% in annual performance reviews; or
  • borrower has a signed sales contract that hasn’t had its closing.
• if either of the above 2 exceptions are met, the borrower has 6 months.

Pre-foreclosure sales will be reported to credit bureaus as short sales and are subject to possible IRS ramifications, including debt cancellation.