If its your own home in a foreclosure action and you’re trying to save possession and ownership, you can either purchase the mortgage from the lender at face value or at a negotiated discount, or purchase the property by putting in the highest bid when the property is offered up for public sale.
Because you have fallen into a foreclosure process, your credit and financial standing will not likely allow for a bank or institutional mortgage, so a foreclosure mortgage through a private mortgage lender is likely going to be your best option.
If there is equity in the property, then a private mortgage lender can step in an either purchase the existing mortgage or provide a new first mortgage to pay out the existing charges against the property. Existing charges would include but not be limited to any mortgage registrations, property tax arrears, or other property liens. Basically a clean title will be required.
The key to getting an equity based foreclosure loan is completing the refinancing process prior to foreclosure liquidation.
Before the liquidation sale, the property has a fair market value that can be established through a third party appraiser that compares the property to similar properties that have recently sold to establish a value.
It’s this established market value that a private mortgage lender uses to determine if there is sufficient equity in the property to support a foreclosure loan.
But, once the property is sold under a foreclosure action, that sale price, whatever it may be, will be the market value of the property at that point in time.
So if you’re try to purchase the property out of foreclosure, you may be able to purchase it for significantly less than the perceived market value. But if a private lender will only finance 65% of the fair market value, and you’re winning bid is well below the established market value which can happen in the foreclosure process, then there is a good chance that any lender will use the lower value when determining how much financing they can provide against the property.
For instance, if an appraisal is completed at the beginning of the foreclosure process that values the property at $500,000, and a private lender is prepared to finance up to 60% of the property value, then the maximum new mortgage amount would be $300,000.
But if you purchase the property out of foreclosure for $300,000, the maximum mortgage amount at 60% is now only $180,000, requiring $120,000 in cash to complete the purchase.
So in order to make private mortgage financing work for you, you need to make sure that there is equity in the property that can support the foreclosure property financing you require.
This is most typically provided in a form of a new mortgage against the property impacted by the foreclosure procedure, although it doesn’t have to be the same property.
In some cases, other parcels of land are leveraged as partial or full security for the new mortgage.
Other foreclosure mortgage strategies include providing a loan against the mortgage registered against the subject property, purchasing the existing mortgage at face value or some agreed upon discount, and leveraging other non real estate assets to provide incremental funds towards the outstanding debt.
In the case of a loan on a mortgage, a private mortgage lender would be looking to finance a portion of registered mortgage amount and would consider the borrower’s equity in the property behind the target mortgage as well as the amount the mortgage has been paid down versus the amount registered.
This type of strategy can be used instead of a new mortgage when there is insufficient security value to pay out all registered mortgages, but enough equity available to pay out the first mortgage foreclosure action.
A similar strategy is when a private mortgage lender actually purchases the existing mortgage, typically at some type of discounted price to increase their return on investment. By accepting an offer to purchase the existing mortgage, the lender pushing for foreclosure has an opportunity to receive a fixed sum of funds versus taking their chances liquidating the asset on the open market.
Each scenario will dictate which of these strategies is the most relevant or relevant at all.
And there can be many different nuances to consider as well with each situation. As a result, the descriptions provided above for each of these strategies is grossly simplified and can become quite involved for any given scenario.
The point here is that there can be a number of ways a foreclosure loan can be placed through a private lender to provide the funds required to stop a foreclosure action and keep you in your home or property.
But the key to any of these approaches is to be working with an experienced mortgage broker who can properly assess the situation and provide workable solutions with private lenders that are interested in these types of deals.
If you’re looking for a foreclosure loan and would like to find out more about your options, give me a call and we can go over your situation together.