A pre-foreclosure sale allows owners to sell their property before foreclosure, paying off as much of the mortgage debt as possible. It can prevent damage to the debtor’s credit rating, but the loan must be in default before the sale can take place. The lender may keep some of the proceeds to pay off the loan balance and other expenses.
A pre-foreclosure sale is a type of real estate sale that makes it possible for the owner to offer the property for sale prior to the actual foreclosure action. A sale approval typically includes a provision that the homeowner about to default on the property use the proceeds of the sale to pay off as much of the outstanding mortgage debt as possible. In the event that the pre-foreclosure sale does not generate enough income to pay off the entire debt, the owner is still held responsible for the difference.
One of the main benefits of the pre-foreclosure sale approach is that it helps prevent the defaulted loan from going into foreclosure. Assuming the sale is successful and the owner can sell the property for at least enough to satisfy the remaining mortgage balance, the end result is less damage to the debtor’s credit rating. In the best of situations, the owner can sell the property for more than the remaining balance, pay off the mortgage, and use the rest of the proceeds to regain some degree of financial stability.
While laws and regulations vary from jurisdiction to jurisdiction, a pre-foreclosure sale generally cannot take place until after the loan is in default. Once that has occurred, the lender and owner can work together to stage the sale and hopefully bring the deal to a mutually beneficial resolution. In some cases, the owner will be the recipient of the proceeds of the sale. More commonly, the lender receives the proceeds from the pre-foreclosure sale, keeps the amount needed to pay off the loan balance and any other allowable default-related expenses, and sends the rest to the former owner.
It is important to note that using a pre-foreclosure sale to avoid foreclosure does not mean that the debtor will not experience some damage to their credit rating. Since the loan must be in default before the sale can take place, this means that the lender will report the default to the credit reporting agencies. At the same time, the sale is still beneficial as the lender will also report that the loan balance has been paid in full, a factor that helps prevent further damage to your credit rating. This helps increase the chances that another lender will be open to financing a mortgage for the consumer once he or she has resolved the financial issues that led to the original default.
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