Approach to Buying Homes in the Early Stages of Foreclosure


Think of the early stages of foreclosure as that period when a homeowner has has been served with a summons by the bank’s attorney(s). It is a period during which a homeowner, faced with having to make several decisions in relatively little time, may find it rather difficult to cope with the circumstances.

S/he has 30 days to answer the summons; since the lender has refused payments in any amount short of the full amount pass due, including tacked-on late charges and attorney’s fees, s/he has to raise the required amount and there’s no one to turn to for that amount of money needed.

S/he still must meet other pressing obligations and living expenses; e.g. utility bills, food, kids, work, etc., while being under pressure to – perhaps – find a place to relocate to should the worst case scenario becomes a reality. The homeowner needs help, and since s/he is still in complete ownership of the property, s/he alone is able to make the decision to sell.


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The question is, will you be the one who makes the deal with a homeowner in this type of situation? Will you approach this homeowner with the right offer and in the correct manner? If you keep in mind that a homeowner facing foreclosure has a financial problem (not a memory loss or sudden case of stupidity) and will listen to reasonable offers, you may be able to make a great deal for yourself.

Let’s face it, if there’s no equity in the property, you’re probably not going to even make a call. When there is enough equity to get you interested in the property you must take into consideration the homeowner’s circumstances and base your approach and presentation around those instead of your desire to grab everything and risk insulting the only person capable of making a deal with you on that home.

As an investor you know it’s a heck of a lot easier to deal directly with the homeowner instead of the lender, so you must be able to convince that individual that you are the ONLY one who is capable of providing a solution to the problems s/he now faces.

You have the answers! You have the money to make a deal whereas the bank takes the home and s/he gets nothing. However you must convey that you will make the transition as smoothly as is possible under the circumstances.

Making your best efforts not to totally deplete the little dignity that homeowner has left will go a long way towards you making the deal to buy that property instead of another of the homeowner getting tugged and pulled in all different directions by the many real estate salesmen, investors and mortgage reps, and then finds it difficult to make any decision at all.

There’s a deal to be made with homeowners whose homes are in the early stages of foreclosure. The right approach will usually help you make a great deal.

Understanding The Cash-Out Refinance


What is a Cash-Out refinance?

A cash-out refinance enables homeowner to remortgage their home for an amount greater than the exiting mortgage balance. Once the new mortgage is approved and a mortgage closing takes place, the homeowner then begins to make repayments on the new higher amount over the course of a new term. In other words, this cash-out refinance results in a brand new mortgage for the homeowner with new interest rate, new term and new payments. So the reason for refinancing should be a good one and the reason for taking cash-out should be as good or better.

When is a Cash-Out Refinance possible?

A homeowner can apply and, most likely get an approval for a cash-out refinance when there is enough existing equity in the home (for a FHA refi, at least 85% of the property’s appraised value must cover the existing mortgage, closing costs and the amount of any check written to the homeowner. For a conventional refi it’s 80%). This is important because the lender is able to justify the approval of increased funds to the homeowner due to the value of the property. Every lender must have security and collateral for every mortgage, and the cash-out refinance is no different.

Homeowners who wish to take advantage of a cash-out refinance offered by a lender should inquire as to whether or not the lender offers this type of refinancing. This is important because not all lenders offer this option. It should actually be one of the first questions the homeowner asks when inquiring about refinance programs. Doing so will save homeowners, who are seeking a cash-out refinance, a great deal of time.

How Can the Cash be Used?

For many homeowners the most appealing aspect of cash-out re-financing is that the additional funds can be used for any reasonable project or undertaking the homeowner wishes to accomplish. The lender will require an explanation (most likely in affidavit form for FHA mortgages) of how the cash-out money will be used.

It has to make sense to the lender and must also be in accordance with refinance mortgage guidelines set by both conventional and the FHA. Most homeowners would probably not refinance their homes and use the cash to gamble in las vegas or Atlantic City, but in the circumstance where there is one or two who might need cash-out refinance funds to gamble with, they would have to look elsewhere because they wouldn’t get it from a mortgage lender.

That having been said, most homeowners I’ve dealt with during my years as a mortgage lender representative had very practical reasons for wanting a cash-out refinance, and in my opinion that hasn’t changed with homeowners wanting to refinance today.

Of course, getting approved for a cash-out refinance is more of a challenge for today’s homeowners due to the loss of equity and underwater mortgages many have suffered as a result of the subprime mortgage crises. Those who have enough equity for cash-out refinancing will be wise to use the funds in a judicious manner. Some of the popular uses for funds received from cash-out refinancing include:

  • Home Improvement Projects
  • Home Renovations
  • Child’s College Education
  • Hospital/Health-related Bills
  • Mortgage Debt Consolidation
  • Credit Debt Consolidation

There are probably a few more, but all the reasons listed above are excellent uses of a cash-out refinance that a lender would certainly approve your cash-out refinance for. Homeowners who are considering this type of a refinancing option should also consider whether or not the closing costs and other expenses related to the loan are tax deductible.

Using the cash-out option to make home improvements is jus one example of a situation where the funds can be tax deductible. Homeowners should consult their tax professional on the matter to determine whether or not they are able to deduct the interest from the repayment of their refinance mortgage.

An Example of a cash-out Refinance

The process of a cash-out refinance is fairly simple to explain. Consider a homeowner who purchases a home and borrows $150,000 at a rate 7% interest to complete the purchase. Now consider the homeowner has already repaid $50000 of the loan and would like to borrow an additional $20,000 to make a rather large purchase or pay off some credit cards. With this additional funding available the homeowner has an opportunity to use the equity in their home to reduce credit card debt thereby increasing their monthly cash-flow.


In the example above the homeowner may refinance for a total of $120,000 at a lower interest rate such as 6.25%. This process allow the homeowner to take advantage of the existing equity in their home and also allows him/her to qualify for a substantial loan at a great rate AND get rid of credit card debt.

Simple Mortgage Choices – Fixed ARM Or Hybrid


Under what circumstances in today’s mortgage market would the fixed, ARM, or hybrid mortgage be best utilized? While the decision to purchase a home is no doubt a major step based on the importance and size of the item being purchased, as well as on the fact that it is one of the few items which requires borrowed money in order to complete the purchase, the decision you will make on the best way to finance this kind of purchase must also be one of the most important decisions you will make.

However, your decision regarding the mortgage type that best suits your home purchase may not be the same after you become a homeowner and you wish to re-finance your home. Whether you are purchasing or want to refinance, the list of available mortgage types you would most likely be selecting from includes a fixed rate mortgage, an adjustable rate mortgage (ARM) or a hybrid mortgage which combines the two options.

The names are pretty much self explanatory but basically a fixed rate mortgage is a mortgage where the interest rate remains constant and an ARM is a mortgage where the interest rate varies. The ARM interest rate varies up and down based on an index such as the treasury 1-year, 3-year, 5-year or 7-year note or the 10-year T-Bill. However there are usually clauses which prevent the interest rate from rising or dropping dramatically during a specific period of time. This safety clause provides protection for both the homeowner and the lender.

Advantages of a Fixed Option

A fixed rate option is ideal for home buyers or refinancing homeowners with good credit who are able to lock in a favorable interest rate. For these homeowners the interest rate they are able to retain makes it worthwhile for the home buyer/homeowner to borrow at the newest, lowest interest rate. The major advantage to this type of financing option is stability. Home buyers/homeowners who finance with a fixed mortgage rate do not have to be concerned about payment variations during the life of the mortgage, thus the term “fixed rate”.

Disadvantages of a Fixed Option

Although the ability to lock in a favorable interest rate is an advantage it can also be considered a disadvantage. This is because home buyers who obtain a prevailing market interest rate at the time of purchase will not be able to take advantage of subsequent interest rate drops unless they re-finance. And every subsequent refinance will result in the homeowner incurring additional closing costs.

Advantages of an ARM Option

An ARM is favorable in situations where the interest rate is expected to drop in the near future. Home buyers and homeowners who are skilled at predicting trends in the economy and interest rates may consider financing with an ARM if they expect the rates to drop during the course of the loan period. However, interest rates are tied to a number of different factors and may rise unexpectedly at any time despite the predictions by industry experts.

A mortgage consumer who can reasonably predict the interest rate markets would be able to determine whether or not an ARM is the best financing option. However, since this is not possible for most home buyers and homeowners, they will have to either rely on their instincts and hope for the best or select a less risky option such as a fixed interest rate.

Disadvantages of an ARM Option

The most obvious disadvantage to financing with an ARM is that interest rates may rise significantly and unexpectedly. In these situations the homeowner may suddenly find themselves paying significantly more each month to compensate for the higher interest rates. While this is a disadvantage, there are some elements of protection for both the homeowner and the lender. This often comes in the form of a clause in the terms of the mortgage contract which prevents the interest rate from being raised or lowered by a certain percentage over a specific period of time.

Consider a Hybrid Financing Option

Home buyers and homeowners who are undecided and find certain aspects of fixed rate mortgages as well as certain aspects of ARMs to be appealing might consider a hybrid re-financing option. A hybrid loans is one which combines both fixed interest rate features and features of adjustable interest rates. This is often done by offering a fixed interest rate for an introductory period and then converting the mortgage to an ARM.

In this option, lenders typically offer introductory interest rates which are extremely enticing to encourage homeowners to choose this option. A hybrid loan may also work in the opposite way by offering an ARM for a certain amount of time and then converting the mortgage to a fixed rate mortgage. This version can be quite risky as the homeowner may find the interest rates at the conclusion of the introductory period are not favorable to the him/her.