Foreclosure property financing of a property you own that is presently in foreclosure with one or more of the existing mortgage holder(s) can be accomplished through a private mortgage lender, but there are some things you need to consider to be successful with this activity.
When a borrower is in a default status on their mortgage and the lender is taking a foreclosure action, an equity mortgage through a private mortgage lender is definitely a potential option, provided that there is sufficient equity in the property to support a new private mortgage financing decision in the borrower’s favor.
Its unlikely that a bank or institutional lender will be interested as they typically have tighter cash flow and credit requirements than a private lender which is why an equity mortgage is the most likely option.
For instance, if the current market value of the property is $400,000 and a private lender is comfortable issuing a mortgage commitment for 60% of that value, or $240,000, then the question is can this amount of money, and your available cash allow you to retain the property through a mortgage financing action?
First, and most straight forward, you payout the existing mortgage holder or holders with the funds provided by a private mortgage holder plus cash if more funds are required than what a private mortgage lender will provide.
Under this scenario, the mortgage lender is paid out, and the foreclosure action is stopped. You would then have a private mortgage in place with a term of one to two years at the most, providing you time to either improve your financial position so that you could qualify for a lower cost, longer term bank or institutional mortgage before the end of the private mortgage term, or take the time required to sell the property for maximum market value in order to preserve your equity.
Second, you could get the private mortgage lender to buy the existing mortgage that has put the property in foreclosure either for the face amount owing or a discounted price. Private lenders are more interested in this type of scenario if they can purchase the mortgage at a discount which increases their return on investment during the time remaining on the mortgage.
In both of these cases, the lending decision is based on the equity in the property, likely established by a third party appraiser.
When a borrower in foreclosure is looking to purchase the property out of foreclosure for a bid lower than market price, the financing equation can change quite a bit.
For instance, if you were successful in buying the property out of foreclosure for a winning bid of $300,000, instead of the fair market value estimate of $400,000, you have essentially been able to acquire the property at a below market price.
But, from a financing point of view, virtually all lenders will look at any sale, regardless of the circumstances, as the current value of the property. The logic holds that if the property was truly worth more, someone else would have been willing to pay more than what you did to get the property back from the lender.
So at a purchase price of $300,000, the lender’s 60% loan to value criteria now puts the maximum mortgage at $180,000 which may or may not work for you.
The key here is to make sure that you have equity to finance, otherwise you may not have sufficient leverage available to stop the foreclosure process.
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel