Closing a Pre-Foreclosure Before the Foreclosure Sale Date

Start with the sale date in the notice of trustee sale or the court's sale notice, confirm it with the trustee or the court, and work backward. List every step that must happen before closing and how long each one takes:

• Any period your state gives an owner in foreclosure to cancel the contract.
• Inspection, financing and other contingency periods in your contract.
• The title search, title commitment and every lien payoff or release.
• Appraisal and loan approval if you are financing.
• Short sale approval from every lender taking less than a full payoff.
• Time for the closing agent to send payoffs and for the trustee or court to take the sale off the calendar.

If the steps do not fit before the sale date, you need a postponement, a faster structure such as cash instead of a loan, or a different property. Recheck the sale date regularly, and more often as it approaches, since dates can move in either direction.

For example, if the sale is set 45 days out, your lender needs about 30 days after the appraisal, and the contract includes a short state cancellation period and a ten-day inspection period, there is almost no room for delay. Build in a buffer wherever you can.

The closing agent needs a written payoff statement for every loan and lien being paid at closing. Request them as soon as the contract is signed, using the owner's signed authorization, and order updates as closing approaches. How to evaluate a pre-foreclosure deal explains how payoffs feed into your price; at closing, the details matter:

• Good-through date. Payoffs expire. If closing slips past the date, the agent needs an updated figure or must add the per-day interest.
• Foreclosure fees and costs. Trustee fees, attorney fees and publication costs are usually included and can grow as the case advances.
• Wiring instructions. Confirm them by phone using a number from an independent source. Wire fraud aimed at real estate closings is a known risk, and changed instructions sent by email are a warning sign.
• Sale cancellation. Ask how and when the lender will instruct the trustee or court to cancel the sale once the payoff arrives.

In a short sale, closing cannot happen until every lender taking less than a full payoff has approved in writing. How to buy a pre-foreclosure covers how the approval package is put together; at the closing stage, focus on the approval letter itself:

• Closing deadline. Approvals usually expire on a set date. Ask for an extension in writing before it passes, not after.
• Net proceeds. The lender approves a minimum amount it will receive. If closing costs or other payoffs rise, the deal may need to be resubmitted.
• Remaining balance. The letter should say whether the lender waives or keeps the right to pursue a deficiency. That matters most to the owner, who should review it with their own attorney.
• Conditions. Approvals often require an arm's-length affidavit and limit payments to the seller. Follow them exactly.

Junior lienholders need their own written approvals, and the final settlement statement must match what each lender approved.

A contract with the owner does not stop the foreclosure. Only the foreclosing lender, the trustee or a court can postpone or cancel the sale, and each lender has its own policy on when it will agree.

If closing cannot happen before the sale date, the owner or the owner's representative usually makes the request to the lender, often with a copy of the signed contract, proof of your funds or a pending short sale file. A request made well before the sale date has a better chance of being considered, but none is guaranteed.

Get any postponement confirmed in writing by the lender, trustee or court, and check the new date against the trustee's or court's own records. A verbal assurance from a servicer representative is not enough. Keep the trustee's or court's contact details handy, and check the sale listing again shortly before the original date. Do not urge the owner to file for bankruptcy or take other legal steps to delay the sale; that decision belongs to the owner and their own attorney.

Close through a title company, escrow agent or closing attorney, whichever is customary in the state. The closing agent holds your funds in escrow, pays every lien from the payoff statements, records your deed and pays the owner any remaining proceeds. An owner's title insurance policy protects you against covered title defects the search missed.

Buying from an owner in foreclosure carries extra legal requirements in many states. Depending on the state, equity purchaser or home equity sales laws and foreclosure consultant laws may:

• Require specific contract wording, notices and even type size.
• Give the owner a set period to cancel after signing, during which you may be barred from recording a deed or completing the transfer.
• Restrict lease-backs, buy-back options and other arrangements that let the owner stay in the home.
• Allow the sale to be undone, or impose penalties, when the rules are not followed.

Federal rules can apply too, for example to mortgage relief services and to what you represent to a short sale lender. Have a real estate attorney licensed in the state review your contract and closing steps before you sign, and tell the closing agent the property is in foreclosure. This guide is general information, not legal advice.

If the sale goes ahead before you close, the property is sold at the foreclosure auction. Your contract with the owner does not bind the lender or the auction buyer, and the owner can no longer sell you the home. In some states the former owner keeps a right of redemption for a period after the sale, which is another question for an attorney.

Plan for this outcome in the contract:

• State that the contract ends and your earnest money is returned if a foreclosure sale happens before closing.
• Keep your deposit with the title company or escrow agent, not with the owner.
• Do not pay the owner or the lender directly before closing, and do not take a deed before the liens are paid.

If you still want the property, you can bid at the auction like any other buyer, under the auction's rules and usually with cash or certified funds. How foreclosure auctions work explains what that involves.

Once the deal closes, confirm with the trustee or the lender's attorney that the sale has been cancelled and taken off the calendar. In judicial states, the case should be dismissed and the lis pendens released. In non-judicial states, the trustee may record a rescission of the notice of default. Ask the closing agent for recorded copies of your deed and each lien release, and follow up on any release that does not arrive.

Confirm that possession passes as agreed, too. Do a final walk-through before closing, and make sure the move-out date and the condition the home will be left in are written into the contract or a separate signed agreement.

For the recording steps that follow any purchase, see closing and recording a property purchase.