Can I Sell My House to Avoid Foreclosure?

If you default on your mortgage payments, a "foreclosure" is the legal process in which a home loan lender sells your property to pay off the outstanding mortgage debt. One way to avoid foreclosure is by selling your home before the foreclosure is over. Things to consider before deciding to take this route include how much home equity you have, your overall financial circumstances, and real estate market conditions that could affect how much you can get by selling your home. If selling your house for a profit isn't possible, you can consider a short sale.

Once foreclosure starts, there's no automatic deadline to sell the property. You can sell your home before the foreclosure process is either initiated or completed. It typically takes months (sometimes years) for a lender to complete a foreclosure, giving you time to sell if you know you can't afford to keep your home. However, you'll have to close the sale before the foreclosure process is finished.

Also, there are other ways to avoid a foreclosure besides selling your home.

Preforeclosure: The Time to Act

If you want to sell your home instead of losing it in a foreclosure, take action as soon as you know you won't be able to make your mortgage payments. The time before the servicer initiates a foreclosure is a good time to start the process. Under federal laws that protect homeowners in foreclosure, in most cases, you must be over 120 days delinquent before the loan servicer can officially start a foreclosure. (For the purposes of this article, the "preforeclosure" stage is the period before the servicer starts a foreclosure.)

The time before a foreclosure starts is typically the best time to sell. You have time to prepare the home for sale (again, 120 days before foreclosure even starts) by making small repairs, cleaning the home, and staging it so that it sells for the best possible price. This approach gives you time to find a buyer who will pay a good price for your home. If you wait until late in the foreclosure process, you might not have time to prepare the house, which means you might need to list it with a low asking price. And you might not be able to sell it in time.

During this preforeclosure stage, you can also submit a loss mitigation application to the servicer. Besides selling your home, you might have other options for avoiding a foreclosure, such as a loan modification.

Consider Also Applying for a Loan Modification or Other Mortgage Relief

A loan modification could make your monthly payments more affordable. If you want to apply for a modification, call your servicer and ask for an application.

Even if you don't get approval for a modification, simply applying can prolong the foreclosure process, giving you more time to sell the property. Or you might qualify for another option, such as a repayment plan, forbearance, or deed in lieu of foreclosure.

Can I Sell My Home After I Get a Foreclosure Notice?

Even if a foreclosure has started, you can still sell your home. If the real estate market is good and you have equity in the property, selling the property will not only get you out from under your mortgage, but you might also make some money on the sale.

Traditional Home Sale vs. Short Sale

Depending on market conditions and how much equity you have, you might be able to sell your home for a price that covers everything you owe to the lender. But if your home is underwater (you owe more than what you can sell it for), you could consider bringing money to the table to cover the shortfall.

If you can't afford to bring money to the closing, you might be able to sell the property in a short sale. With a "short sale," you sell your house for an amount that's less than your outstanding loan balance. You'll need to get approval from your lender for a short sale.

If you live in a state that allows lenders to sue for a deficiency judgment after a short sale, you should also try to get your lender to agree in writing to release you from repaying the deficiency. (Otherwise, after getting a deficiency judgment, the lender could place liens on other property you own, garnish your wages, or freeze your bank accounts.) However, if the lender forgives the deficiency, you might face tax consequences. If the lender won't waive the deficiency, you might be able to work out a repayment plan for the deficiency.

Is a Short Sale a Good Alternative for Me?

Again, a short sale is when you sell your home for less than what you owe on the mortgage loan. Because the lender must give you permission to do a short sale, you'll have to submit a loss mitigation application to your servicer to get approval. You'll have to prove that you can no longer afford the house on your current income and that you don't have other assets you could liquidate to pay the debt.

What Are the Steps for Selling a Home in Preforeclosure?

Here are the five basic steps for selling your home preforeclosure.

1. Learn your home's fair market value. Use an online tool or check Zillow to get an idea of what your home is worth. This is a good way to get a rough estimate of what you might be able to sell your home for. But you should speak to one or more real estate professionals when it comes to actually pricing your home.
2. Get a payoff quote from your loan servicer. Contact your loan servicer and ask for a payoff quote so you'll know exactly how much you need to pay off the mortgage loan in full. The quote will include the unpaid principal balance and interest, plus any fees and costs. Completing these first two steps will give you an idea of how whether selling your home will bring in enough money to pay off the loan or whether you'll need to do a short sale.
3. Figure out how much you'll pay in selling fees. When selling your home, in addition to paying off the mortgage loan, you'll have to pay any fees for staging and preparing the house for sale, real estate agent commissions, closing costs, seller concessions, and moving costs.
4. Stay in contact with your loan servicer. Throughout the process of selling your home, don't ignore calls or letters from your servicer. That way, you'll know when a foreclosure starts, where you are in the process, and whether any other options are available.
5. Hire a real estate agent. A real estate agent can help you figure out the asking price for your home and place it on the Multiple Listing Service (MLS). An agent can also give you tips on staging, market the property, and handle the sales contract paperwork. An agent can also oversee the short sale process.

Benefits Of Selling Your Home to Avoid Foreclosure

Selling your home before it's foreclosed has several benefits. First, if you have equity in the property, you'll probably be able to recoup all or some of it. Also, if you want to buy another home sometime in the future, you'll be able to do that much sooner if you can avoid a foreclosure. If you sell your home in a traditional sale, how quickly you'll be able to buy another property will depend on how fast your credit rebounds from the missed payments. If you do a short sale, you can buy a new home in as soon as two to four years, depending on the circumstances (versus three or seven years, in most cases, after a foreclosure).

You'll also avoid having a foreclosure listed on your credit reports. Most foreclosures will stay on a credit report for seven years and hurt your credit scores. (Although a short sale will also hurt your scores.)

In addition, you might be able to avoid a deficiency judgment. In a traditional sale, the proceeds will pay off your mortgage debt. But with a short sale, there will be a deficiency balance if the proceeds from a sale aren't enough to pay off all you owe on the mortgage. Depending on state law, the lender might be able to recover this difference from you by getting a deficiency judgment. However, you can ask the lender to waive the deficiency as part of a short sale.

How Long Does It Take to Sell a Preforeclosure Home?

How long it takes to sell a property depends on pricing, the home's condition, and the local real estate market. Whether or not the homeowner is facing a foreclosure doesn't matter other than you need to price it competitively so it sells either before the foreclosure process starts or finishes. For example, if homes in your neighborhood are worth $500,000 and $550,000, consider listing your home closer to $500,000 to attract more offers than nearby higher-priced properties.

With a traditional sale, you don't have to disclose to a potential buyer that you're behind in payments (but if you do a short sale or the property goes into foreclosure, they'll find out). You should, however, tell your real estate agent why you want to sell so they can help you price the home so it sells quickly.

If you price your home right, it might only take a couple of weeks to sell.

Can I Stop a Foreclosure Once It Starts?

You can apply for a loss mitigation option even after a foreclosure starts. But you can't wait until the very last minute. Under federal law, you must submit your application more than 37 days before a foreclosure sale to ensure the servicer has to review it. Some state laws are more generous. However, you should start considering different options as soon as you miss a payment.

Depending on the circumstances, you might consider filing for bankruptcy. The automatic stay will temporarily stop a foreclosure action and most other debt collection activities.

What Happens If You Can't Sell the Home in Time?

The amount of time the home is in foreclosure depends on whether the process is judicial or nonjudicial and varies among the different U.S. states. The longer the process, the more time you have to sell the property.

Generally, you can sell the property up until the foreclosure sale happens. But in some states, you can sell the property during the post-sale redemption period. However, once the foreclosure process is complete and title transfers to the person or entity that bought the home at the foreclosure sale, the property is owned by someone else and it's too late.

Final Considerations for Selling Your Home to Avoid Foreclosure

Selling your home to avoid foreclosure is a difficult choice, both emotionally and practically. The pressure of a looming foreclosure can be overwhelming, and it's normal to feel stressed out, sad about having to leave your home, or even guilty about the decision. While feeling these emotions is typical, try to concentrate on the positives of taking proactive steps to regain control of your financial future and avoiding the added stress of going through the foreclosure process. Focus on getting the house sold, assessing your future housing options (stay within your budget), and planning your relocation.

Once you've sold the house, review your credit reports (you can get free weekly reports at annualcreditreport.com) and start making a plan to fix your credit. If you need help, talk to a credit counselor at a nonprofit agency and get a copy of Credit Repair, by Amy Loftsgordon and Cara O'Neill (Nolo).

Ultimately, making on-time payments on any remaining debts and saving money on housing payments each month can go a long way toward rebuilding your credit and put you on the road to owning a home again someday.

Getting Help With Foreclosure

For more information about how foreclosure works in your state and how long the process will take (or if you want to learn about possible defenses to a foreclosure, which could delay the process and give you more time to sell), consider talking to an attorney.

To get information about foreclosure alternatives, like a loan modification, short sale, or deed in lieu of foreclosure, a HUD-approved housing counselor can tell you more about these options, evaluate your financial situation, and help you submit an application to your servicer.

Also, some nonprofit organizations offer credit counseling. To find a reputable nonprofit foreclosure prevention or credit counseling agency, look for a company that's accredited by the Council on Accreditation (COA) or the International Organization for Standardization (ISO). Consider using an agency that's a National Foundation for Credit Counseling (NFCC) member accredited by the COA. Don't hire a for-profit debt relief company.

If you want to learn about filing for bankruptcy, talk to a bankruptcy lawyer.