Can you sell a house in foreclosure?

Life isn’t easy. Things have gotten more expensive than ever while wages have remained largely stagnant. It’s not easy to afford to live anymore, and many Americans are just one or two unexpected major expenses away from real financial hardship.

If you start missing mortgage payments, you may be at risk of losing your home. If you used a mortgage loan to buy your home, technically the bank owns it — not you. So, if you miss a few monthly payments and the bank begins to demand that you bring your balance back to current, you could be facing a real problem. Nobody wants to lose their home, but nobody wants to be saddled with enormous debt with no chance of paying it back.

You do have options, however. Even if your home goes into foreclosure, you can sell it to get out of debt. It doesn’t need to be your first option, but it is an option.

What is foreclosure?

Distilling it to its simplest terms, foreclosure is when a borrower defaults on their mortgage payments, resulting in the lender taking possession of the property. Most often, they attempt to then recover their losses by selling the property.

Foreclosure doesn’t happen after just one or two missed mortgage payments. There is always a foreclosure process and, depending on the state, it can be very drawn out. Typically there are two ways for a lender to foreclose on a home — judicial or non-judicial.

Judicial foreclosure

In a judicial foreclosure, a lender files a lawsuit, requesting the court to issue an order to allow a foreclosure sale. Should the court agree, it will issue a letter to a borrower. Should the borrower fail to respond in writing, the lender will win and be allowed to evict them and sell the home.

The borrower is entitled to defend the lawsuit, in which case it turns into a legal battle. Should the lender win, the borrower is out the legal fees and a home, as the home will be sold at auction. Still, even if this happens, a borrower may have the opportunity to sell the house before it goes to auction.

Non-judicial foreclosure

A non-judicial foreclosure does not require court proceedings to force the sale of a home. Most lenders prefer this process because it’s less expensive and usually quicker than going through the courts. The process is still governed by law; they can’t just sell your house out from under you, and lenders must complete a process of due diligence and awareness before they may foreclose upon and sell a home.

How long does a foreclosure take?

When the foreclosure process begins depends on where you are and the terms of a loan. Rules, processes, and timelines vary between states and mortgage lenders, but companies typically begin foreclosure between three to six months after a first missed mortgage payment.

Usually, after three months of missed payments, a borrower will receive a Demand or Notice of Accelerate letter that dictates how much is owed and gives 30 days to get the balance current.

From the date of that letter, it could be as soon as two to three months to sell the property should a borrower take no action. That’s not common, however, as the national average foreclosure time is 852 days. States like Hawaii and New Jersey actually average more than 2,000 days to complete the foreclosure process — that’s more than five years.

Foreclosure options besides selling

During this time, a borrower can pursue a number of options before selling the home. Hiding and pretending it isn’t happening is the absolute worst thing to do. Lenders will start the foreclosure process with or without your consent. Some things you can do:

• Restructure your loan or ask for forbearance: Lenders don’t want to find someone else to buy a home, they just want on-time payments. As such, many are willing to extend the time of the loan, modify loan payments, or even reduce the interest rate to make it easier to pay. If you qualify for forbearance, you could reduce or suspend monthly payments while you sort out short-term money issues.
• Find money: Not that everyone has money just lying around, but if you have any assets you can liquidate to pay your mortgage, this is the time to do it. It may be time to sell any stock you have, or a cool collection of rarities. This is the time to turn it to cash. You may have friends or family who are able to help you out with a gift or loan, too.
• Declare bankruptcy: As a last resort, you can declare bankruptcy. You’ll need to hire a lawyer to navigate the bankruptcy process and expect your credit to take a major hit, but it can help you restructure debt and finances and keep the house.
• Sell pre-foreclosure: If you’re not incredibly attached to your home, selling pre-foreclosure is usually the best time. If you can see which way the wind is blowing, you’ll have a few months to get the home cleaned up, make essential repairs, and hire an agent to get the best price possible for your home before you suffer any legal costs and impacts to your credit that typically come with foreclosure. That way, you can repay the bank, pocket a little cash, and be able to rent or buy a new place.

What’s the process of selling a house in foreclosure?

You can still sell your home if you have entered into foreclosure, or if you’re in pre-foreclosure. It’s often the best way to pay the lender everything you owe, including penalties and back payments. You can get out of debt and keep your credit from taking an enormous hit. You may not get the profit you want, but you should be able to avoid financial catastrophe.

So, how do you do it?

1. Notify your lender

Even if you’re only considering selling, let your lender know. Giving them a heads up will likely make them more flexible in postponing the foreclosure auction and working with you to get paid up. Ask the lender how much time you have and, if you can, try to move quickly before the debt gets too large.

2. Hire a real estate agent

You don’t have to sell your home with a real estate agent, but if you’re facing foreclosure, an agent can help you find the best price and take some stress off your plate. Yes, you’ll have to do some math to make sure any commission you pay an agent doesn’t leave you without enough to pay off the debt you owe, but that’s part of the reason you find and hire an agent in the first place. 

Some real estate agents even specialize in foreclosure properties. They’ll help you get a better deal and can run the numbers with you so you have a better idea of how you will come out at the end.

If you decide to sell yourself, you’ll need to do some market research. You can do that by looking at publicly available sales data in your neighborhood, seeing how much other homes have sold for. Remember to factor in the condition of your home and only compare it to similar ones. (A 4-bed/2-bath doesn’t compare to a 3-bed/1-bath.)

Selling a home by yourself can take up a lot of energy during what is already a stressful time, so you might be better off working with a professional. 

3. Consider a short sale

When you have little or no equity in your home, you may have to do a short sale. For instance, if your house appraises for $400,000, but you have a $500,000 mortgage, you’re in a short sale position. The sale is “short” because the lender is willing to accept an amount that is less than what is owed, so long as you sell the property.

Not everyone qualifies for a short sale. You will have to prove financial hardship to the lender with documentation like tax forms, expense reports, and any extenuating circumstances like a medical emergency that may have caused the hardship. Losing a job generally doesn’t qualify, unless it was due to circumstances outside of your control and recovery of the job is unlikely.

If the lender agrees that paying your mortgage will not be possible, they’ll approve you to begin the process of a short sale. A short sale will damage your credit like a bankruptcy will and could prevent you from buying another property for years. 

Learn more about buying a home after bankruptcy

You will definitely need to hire a real estate agent and an attorney to help with the process, which cuts into your proceeds but will help you navigate the complex waters of a short sale. They’ll communicate with the lender and with you to make it very clear what you’re paying back to the lender and what you’ll keep for yourself. A lender may not allow you to keep anything. They may not accept your short sale bid and decide to proceed with foreclosure anyway. This is why it’s crucial to have an agent or attorney — your lender doesn’t have to accept a short sale offer after approving the process. They can still push you into foreclosure, making a short sale a gamble.

4. Make a traditional sale or sell to an investor

Finally, if you’re in debt and want to get out quickly, sell the house the traditional way. As long as you’re transparent with your lender that you’re trying to sell the home to pay back the debt, they should play ball. Foreclosure is an expensive process for them, too.

The quickest way to sell is likely to an investor or a company that buys houses for cash. Real estate developers and iBuyers are a dime a dozen these days. If you know you want to sell, doing so to an investor can be a compelling option. You won’t get the best price possible, but you’ll get the deal done quickly and, if you sell for enough, you may be out of debt within a few weeks. They may even be willing to make repairs that you haven’t gotten around to or don’t have the money for.

If you want the best price possible, you’ll have to be patient. But don’t be too patient. The bank won’t wait forever, and you’ll continue to incur more debt the longer you can’t pay back the mortgage and penalties.

FAQs

Here’s what else you need to know about selling a house in foreclosure

Can I sell my house if it’s in foreclosure?

Yes, you can sell your house if it’s in foreclosure. Often, this is the best way to get out of foreclosure and avoid significant impacts to your credit.

When does a short sale take place?

Short sales typically occur when a homeowner sells their property for an amount less than the outstanding mortgage balance, with the lender's approval. It is often pursued as an alternative to foreclosure when the homeowner is unable to keep up with mortgage payments.

Can you stop a foreclosure?

Yes, there are options to stop or delay foreclosure. These may include negotiating a loan modification, arranging a repayment plan, seeking forbearance, pursuing a short sale, or considering a deed in lieu of foreclosure. The availability of these options depends on individual circumstances and the lender's policies — you should consider consulting with a lawyer or financial advisor to see what might be best for you.

How do you prevent foreclosure?

The best way to prevent foreclosure is to pay your monthly mortgage payment on time! Before buying a home, understand how much house you can afford. you don’t fall behind on the mortgage, you won’t face foreclosure. Should you fall behind, or fear you will, don’t hesitate to let your lender know. They’ll be more willing to work with you than you might expect because foreclosure is an expensive, undesirable option for them, too. Should you enter into foreclosure, selling the home is the quickest and best way out.