Your home made sense when you bought it. But now, years later, your financial situation has changed. Perhaps your insurance rates and property taxes have dramatically risen — maybe you’ve retired or changed careers. Either way, you’re underwater and sinking fast.

Foreclosure can be a harrowing process. Just a few missed mortgage payments will send the bank after you — and you may feel you have no choice but to keep paying. But if you’re treading water now, there could be a better answer: selling your home. 

To give you all the information you need to make this critical decision, we’ve conducted our own research and talked to Nancy Reynolds, broker associate and founding sales partner at Rainmaker Real Estate. A lifelong resident of Silicon Valley, Nancy Reynolds’ passions include fixer-uppers and historic homes. Today, she’s here to help us demystify the process of selling a home in pre-foreclosure.

“In my experience, property owners usually get to a point of exhaustion over dealing with the bank and eventually sell before getting their home repossessed,” explains Reynolds. “Owners may have a lot of equity in their home and though the bank will charge them for the legal fees and court fees associated with the foreclosure process, the owners still walk away with money when they sell.”

What is the foreclosure process?

Thousands of homes fall into foreclosure every year — you aren’t alone. A home that was once affordable can easily become unaffordable, due to things like rising property tax rates. 

Foreclosure is a legal process lenders initiate when a homeowner fails to make mortgage payments. But before a foreclosure officially happens, the property generally falls into pre-foreclosure.

Reynolds says, “If a property is in "pre-foreclosure" status, this means that a judgment has been granted to the lien holder to take the home back from the owner due to lack of payment. Lienholders file this judgment as the first step to protecting their investment, but they don't usually foreclose in the end. The reason why is because banks are not in the business of selling homes. They have to pay attorneys and court fees, and they simply don't have the resources to capitalize on the market when selling a foreclosed property. However, by having this judgment filed, the bank can act on very short notice if needed.”

The entire process of foreclosure process can vary slightly depending on the state but generally follows these stages:

1. Missing Payments: The process begins after a homeowner misses several mortgage payments. Lenders typically send notices and attempt to reach out to the homeowner.

2. Pre-Foreclosure: After 90 days of missed payments, the lender will issue a Notice of Default (NOD). This notice informs the homeowner that foreclosure proceedings will begin unless the debt is settled.

3. Foreclosure Auction: If the homeowner cannot rectify the situation, the property is scheduled for a public auction. This can happen several months after the NOD is issued.

4. Post-Foreclosure: If the property doesn't sell at auction, the lender takes ownership. The homeowner is evicted, and the house becomes a bank-owned property or REO (Real Estate Owned).

Each state has its own specific timeline and legal requirements for foreclosure, making it crucial to understand your local laws. Being proactive and seeking assistance early in the process can make a significant difference.

Why should you sell your house before foreclosure?

Selling your house before foreclosure is finalized offers several potential benefits. First, it can help avoid further damage to your credit score. A completed foreclosure can significantly lower your credit score — according to Nolo, by 85 to 105 points — making it difficult to secure loans or credit cards in the future. By selling your house before the foreclosure is finalized, you might mitigate some of this damage, depending on the circumstances.

Second, selling your house can allow you to retain any equity you’ve built up over time. If your home’s market value is higher than what you owe on your mortgage, selling the house can provide you with financial resources to start over. This is especially important because, in a foreclosure, you typically lose all equity in your home. (This isn’t a direct cause of the foreclosure — you still could get equity back — but rather a cause of all the foreclosure fees and the lower sales price eating into it.)

Finally, selling your house can reduce the emotional and psychological stress associated with foreclosure. The process is often lengthy and fraught with uncertainty. Selling your home gives you more control over the situation, potentially providing a sense of relief. Once you’re done, you’re done.

While it may feel like you’re in a vulnerable situation, you still have a lot of leverage. Nancy notes, “Homes can stay in pre-foreclosure status for years in a strong real estate market. The bank knows that if prices continue to rise and sellers stay in communication and make some payments, eventually, they will get more money than if they foreclose now. Property owners can sometimes live in the home for several years without paying their full payments and, eventually, sell the home for top dollar and walk away with most of their equity.”

On the other hand, allowing the foreclosure process to continue can lead to several negative outcomes. You may face eviction, which can be both traumatic and disruptive. Additionally, you could be subject to deficiency judgments, where the lender seeks to recover the remaining balance owed after the sale of the property, adding further financial strain.

How do you sell a house in foreclosure?

You’ve got several options. Each option has its own set of requirements, benefits, and potential challenges. Critically, you don’t have to go it alone. There’s a reason why many people choose professionals to help them navigate their real estate woes — it can be complicated.  

“Owners in this position can hire a RealtorⓇ to market and negotiate on their behalf as if their home was not in pre-foreclosure,” says Reynolds. The earlier you involve a real estate agent, the better.

Short sales

A short sale occurs when a homeowner sells their property for less than the outstanding mortgage balance with the lender's approval. This process can be complex, requiring negotiation with the lender to accept a reduced payoff amount. The potential benefits of a short sale include avoiding foreclosure and minimizing damage to your credit score. However, the process can be lengthy and requires thorough documentation and approval from the lender.

To initiate a short sale, you must provide the lender with a hardship letter explaining your financial situation, including financial statements and other documentation. If the lender agrees to the short sale, they will typically require you to list the property with a real estate agent and make a good-faith effort to sell it. While a short sale can be a viable option for avoiding foreclosure, it's essential to understand that it may still have tax implications and impact your credit.

Cash sales

Selling your house for cash can be a quick and straightforward way to avoid foreclosure. Cash buyers, often real estate investors, can close the sale quickly, providing you with immediate funds to pay off your mortgage. This option can be particularly beneficial if facing an imminent foreclosure auction.

The primary advantage of a cash sale is the speed and certainty of the transaction. However, finding a cash buyer willing to pay a fair price can be challenging. Real estate investors may offer less than the market value of your home, as they often seek properties at a discount. It's essential to carefully evaluate offers and consider working with a real estate agent to help you find a reputable cash buyer.

Deed in lieu of foreclosure

A deed in lieu of foreclosure involves voluntarily transferring ownership of your property to the lender in exchange for being released from the mortgage debt. This option can be beneficial if you're unable to sell the property and want to avoid the negative consequences of a foreclosure.

To pursue a deed in lieu of foreclosure, you'll need to communicate with your lender and provide documentation of your financial hardship. If the lender agrees to the arrangement, they will typically require you to vacate the property and leave it in good condition. While a deed in lieu of foreclosure can help you avoid foreclosure and potential deficiency judgments, it may still have tax implications and impact your credit score.

Regular sale

But, as Reynolds noted, you may just be able to sell your house like any other property. If you don’t owe more on the property than you can sell it for, you can proceed as though you’re simply selling your house. You will likely need to keep the bank apprised of all your movements — so they know you’re working on the sale — but otherwise, the sale will proceed as normal.

How to prepare for a foreclosure sale

Proper preparation is crucial to ensuring a successful sale if you've decided to sell your house to avoid foreclosure. The major difference is that you’re introducing a third party: the bank. You must keep the bank in the loop regarding all your actions.

Here are some key steps to take:

• Gather Necessary Documentation: Before listing your property, gather all relevant documentation, including loan statements, foreclosure notices, and any correspondence with your lender. Having these documents organized and readily available will help streamline the process and demonstrate your commitment to resolving the situation.

• Price and Market the Property Effectively: Pricing your property competitively is essential for attracting buyers quickly. Work with a real estate agent to determine the appropriate listing price based on market conditions and the property's condition. Your agent can also help you develop a marketing strategy to reach potential buyers, including listing the property on multiple platforms, hosting open houses, and utilizing professional photography.

• Work with a Professional Real Estate Agent: A knowledgeable real estate agent can be an invaluable resource when selling a house in foreclosure. They can guide you through the process, help you navigate negotiations with lenders, and ensure that all legal and financial aspects are handled correctly. Choose an agent with experience in foreclosure sales to maximize your chances of a successful outcome.

Redy can help you find an agent specializing in foreclosures, short sales, and your unique situation — so you can rest assured that you’re in helpful, confident hands. At Redy, you can get a list of skilled, experienced real estate agents interested in representing your property — just a few clicks away.

Finally, legal and financial considerations

The process of foreclosure goes beyond just real property; it does have some legal and financial consequences. Knowing that, you might wonder how selling a house in foreclosure could impact you.

Here are some key points to keep in mind:

• Deferred Maintenance: As Reynolds notes, “A property owner who can't pay their mortgage probably can't keep up with maintenance and repairs either.” If you’re headed into foreclosure, likely, you don’t have money for repairs and maintenance. That’s probably OK. Selling a house as-is means that you may not get top dollar for it, but it doesn’t have to affect the speed of your sale — especially in a hot market.

• Potential Tax Implications: Selling a house in foreclosure can have tax consequences, particularly if the lender forgives a portion of the mortgage debt. Depending on your financial situation and applicable tax laws, the forgiven debt may be considered taxable income. Consult a tax professional to understand the potential implications and explore any available relief options.

• Impact on Credit Scores: Foreclosure, short sales, and deeds in lieu of foreclosure can all negatively impact your credit score. The extent of the damage will depend on your overall credit history and the specific circumstances of the sale. While selling your house can mitigate some damage compared to a completed foreclosure, it's essential to be prepared for the potential impact on your credit and future borrowing ability.

In addition to working with a real estate agent, you can also talk to other professionals: real estate lawyers and tax professionals. Your accountant could give you a better overview of how this will impact your taxes, while a lawyer can help you through any legal complications — such as selling a foreclosure that you jointly own with another person.

Is it time to sell your home?

Luckily, selling a foreclosure isn’t as hard as it might seem. Reynolds notes, “Once the property is in contract, the trustee for the bank will go through a court approval process to make sure all liens are paid through escrow, and everyone can move forward just like a normal sale.”

Selling a house in foreclosure can be a complex and emotionally challenging process, but it offers a potential solution to avoid the worst consequences of foreclosure. By understanding the foreclosure process, weighing the benefits and drawbacks of selling, and exploring your options, you can make informed decisions that best suit your circumstances. Working with experienced professionals and being proactive can significantly improve your chances of a successful outcome.

If you’re currently facing foreclosure, why not connect with an agent? They can help you explore your options. At Redy, you can create a property profile and connect directly with agents ready to help you. Create your free profile today.

Jenna Inouye is a professional freelance writer specializing in the areas of real estate, technology, and finance. Her professional experience extends to her work in property management, accounting, and brick-and-mortar retail, as well as a substantial background in journalism and thought leadership for businesses and high-net-worth individuals.