Need some advice on a pre foreclosure home purchase.

[Mike F.]

I'm hoping someone on the board can give me some good information. 

I'm moving forward on buying a house from a friend, it will be my primary residence. The home is up to date on the 1st but its in pre-forecloser on the 2nd. My friend is talking to the banks attorney trying to get a fair settlement number. 

For the deal to work I would need them to reduce the payoff by roughly 5k on a 40k payoff, the 40k includes all the crazy fees the bank charges when a loan goes into default. She offered them 35k to settle and do it within 35 days. During that time I would secure a mortgage to pay off the first and second. 

So I have two questions. 

-Is the 2nd mortgage bank likely to settle or do they typically settle in a situation like this?

-What are the pitfalls of a deal like this? 

FYI, I have the cash to purchase it outright but I would much rather secure it with a mortgage and get a better interest rate than doing a cash out refi in 6 months and having to pay a higher rate.

The house has a little built in equity, purchase price 130k market value 145-155k.

I will be contacting an attorney but I feel like this is a good place to get real world knowledge. 

thanks in advance for all replies!