A home doesn’t just fall into foreclosure status. There are stages and processes that take place behind the scenes before a home is sold via foreclosure. One of those steps is known as a pre-foreclosure.
No one ever wants to experience foreclosure. Understanding the pre-foreclosure processes and which options are available to you as a homeowner is important. We’ll be covering everything you need to know below.
What Does Pre-Foreclosure Mean?
What does a pre-foreclosure mean? Before unpacking that question, let’s take a step back and review what a foreclosure is. A foreclosure is when the lender seizes the property because the homeowner has not lived up to their contract by paying the mortgage. This is a legal right that the lender holds, and this right can be found within the original closing documents.
A pre-foreclosure is what occurs before the house actually goes into a full foreclosure. If a homeowner were to ever fall behind on the mortgage, the mortgage company will make numerous efforts to collect their money.
This includes sending letters to the home’s address and contacting the homeowner by phone to discuss payment options. If their communication efforts are left unanswered, the lender has no choice but to move forward with the pre-foreclosure and foreclosure processes.
How Pre-Foreclosure Works
If you are late on a single payment, your home will not move into the pre-foreclosure status. Generally speaking, most lenders won’t move forward with this process until the homeowner falls behind on their mortgage by at least three to six months.
If or when that occurs, the lender will execute the first steps of the pre-foreclosure process. The pre-foreclosure status is essentially a timeclock between the homeowner and the lender. If the outstanding balance isn’t paid in full within a specific period of time, the lender will move forward with the foreclosure and reclaim the property as their own asset.
What To Do If Your Home is in Pre-Foreclosure
If you own a home and it’s in the pre-foreclosure status, you have options. You can take measures to avoid your home going into foreclosure. Let’s take a look at some of them!
Consider Loan Modification
One of the first options you could try is modifying your existing mortgage, especially if you purchased your home years ago when interest rates were higher. Refinancing your home with a lower interest rate can save you hundreds of dollars each month.
It can also make the mortgage payment more manageable for you. Additionally, changing your mortgage from one type to another, such as converting from an FHA loan to a conventional mortgage, can also help you save quite a bit of money.
Try a Short Sale
A short sale is another option you may want to consider if your home is in pre-foreclosure. Many mortgage lenders do not like to hold onto and sell physical real estate. Therefore, they may be inclined to do a short sale.
A short sale is when the homeowner sells their home for less than what they owe on it. For example, if the outstanding mortgage balance is $280,000, the lender and homeowner can join together to sell the property for $250,000.
The homeowner isn’t responsible for the $30,000 difference, but it will negatively impact the homeowner’s credit score as well as their ability to buy another home in the near future.
Get a Deed in Lieu of Foreclosure
A deed in lieu of a foreclosure is when the homeowner signs the deed over to a mortgage company. In exchange, the mortgage company will forgive the debt. Like a short sale, this will result in the loss of their home and subsequently require the homeowner to move. On the bright side, this option might not have as negative of an impact on your credit score as the others.
Forbearance is when the mortgage company agrees to stop collecting monthly payments for a specific period of time. However, once the period of time has elapsed, the mortgage company typically requires the homeowner to pay the outstanding balance in full via a one-time payment.
For example, if your mortgage is $2,000 per month and your forbearance period was 4 months, the mortgage company would expect a $8,000 check at the end of those 4 months.
Talk To Your Lender About Repayment Plans
Lenders are also open to conversations regarding repayment plans. If you temporarily fell behind with your finances due to an unforeseen circumstance, a mortgage company may be willing to work with you.
For example, if you were injured and your injury made it impossible for you to work, then the situation would prevent you from earning an income. So, a mortgage company may be willing to accept smaller payments or interest-only payments for a set period of time until you are able to return to work.
Should You Buy Pre-Foreclosure Homes?
A pre-foreclosure is not only on the mind of a homeowner. It could also be on the mind of a homebuyer. If you’ve ever shopped for homes online before, you’ve likely seen homes that are within the pre-foreclosure status. But should you buy them? Let’s explore what it means to purchase a pre-foreclosure home.
Getting a Deal
Pre-foreclosure homes, or homes soon to be in foreclosure, are generally priced below the market value of the home. The reasoning is simple: the lender just wants to get back what is owed on the home as the lender typically isn’t in the business of buying and selling physical real estate properties.
If the home was initially purchased for $400,000, and the existing mortgage is $250,000, the lender may just be interested in recovering $250,000 instead of the current market value of the home. Therefore, you may be able to buy a house for a great deal!
Even though the house may be priced well below market, it might not be in your best interest to purchase the property. If the homeowner fell behind on their mortgage payment, it’s safe to assume that they did not have the money to maintain their home.
There could be mechanical issues with various appliances, the roof may be in terrible condition, and any repairs that were done to the home may have been done incorrectly or unsafely just to save money. This is not true for all homes with a pre-foreclosure or foreclosure status, but it certainly applies to many of them!
Know Your Options
Whether you're a homeowner facing a pre-foreclosure situation or a homebuyer looking to purchase a home in foreclosure, you should be aware of your options. A real estate transaction on both the buying and selling side can have lingering side effects.
Knowledge is power, and knowing your options can help you avoid a costly mistake!
This page last updated: March 21, 2022