Homeowners who fall behind on their payments run the risk of having the lender repossess their home. However, the lender must work through a series of steps before foreclosure is set in stone. Pre-foreclosure is the first step in that process.
What Is Pre-Foreclosure?
Lenders generally consider you to be in default on your mortgage after you’ve missed your second or, more commonly, your third consecutive payment. The timeline varies by lender, within the minimum set by your state.
At this point, the lender sends you a certified letter, called a notice of default, giving you 30 days’ notice that it is going to begin foreclosure proceedings. Pre-foreclosure begins when you receive that letter. Although you haven’t lost your home at this point, pre-foreclosure means you’re in the beginning stages of foreclosure and will lose your home unless you take action.
The lender submits a copy of the default notice to your county recorder’s office, and it typically publishes notification in a local newspaper as well. These public notices let interested parties know that your home is in danger of foreclosure.
How Does Pre-Foreclosure Work?
Your home loan likely falls into one of two categories: mortgage loan or deed of trust. A mortgage loan consists of a promissory note, which is the contract that obligates you to repay the loan, and the mortgage, which is a lien that secures the loan. The promissory note says that if you default on the loan, the lender can recoup its losses by foreclosing and selling the home to recoup its losses.
A deed of trust also uses your home as collateral, but instead of using a mortgage as security, a trustee holds title until the loan has been repaid. In the event of default, the trustee can sell the home to recoup the lender’s losses.
What happens after your receive your letter of default depends on the type of loan you have.
Judicial vs. Nonjudicial Foreclosure
In most states, your lender will use a judicial foreclosure to repossess your home in the event you default on your mortgage loan. A judicial foreclosure is a court proceeding whereby the lender files a civil lawsuit against you in a state court. The courthouse serves you with notice of the suit. What happens next depends on the outcome of the trial. If the judge approves the foreclosure, a date will be set for the foreclosure sale.
Pre-foreclosure can last many months in a judicial foreclosure because of the time it takes to file the suit and have the case heard. Three to 10 months is typical, according to Quicken Loans.
If you have a deed of trust or live in a state that uses nonjudicial foreclosure, there won’t be a court proceeding. The exact procedure used varies by state, but because the lender doesn’t have to take you to court, it can foreclose faster, which means your pre-foreclosure period is shorter than with a mortgage loan.
Pre-foreclosure ends with foreclosure if you’re unable to or choose not to take action to stop the foreclosure. The home will be sold at auction if you have a mortgage, or at a trustee sale if you have a deed of trust.
How To Get Out of Pre-Foreclosure
If you want to prevent foreclosure and get out of pre-foreclosure, you’ll need to contact your lender right away to find out what your options are. They’ll differ depending on whether your hardship is temporary or is likely to continue for the foreseeable future — and whether or not you want to hold on to your home.
Options To Stay in Your Home
Repaying the full amount for which you’re in arrears gets your home out of pre-foreclosure and stops the foreclosure process, but you’ll have to work with the bank to arrange it.
Good To Know
A forbearance can be a good option if you’re experiencing an ongoing but temporary hardship and you want to remain in your home. It reduces your payment or lets you skip payments for some period of time. After that, you’ll either be on a payment plan to make up the delinquent payments as you make your regular payments or defer payments to the end of your loan term.
In the event you don’t expect to be able to resume your regular payments but you want to remain in your home, you might be able to refinance or modify your loan to make it more affordable. Modifications might include stretching your payments out over a longer loan term or reducing your interest rate.
Options To Leave Your Home
The best option for leaving your home is to sell it. But unless you can sell it for enough to repay your mortgage balance, you’ll have to sell through a short sale. A short sale is when, with your lender’s permission, you sell your home for less than you owe on the mortgage. But simply listing your home for sale doesn’t automatically stop the foreclosure process — you’ll have to sell the home for that.
Another option, called a deed in lieu of foreclosure, might be possible if your home is no longer affordable and you want to give it up. A deed in lieu is an arrangement where you simply transfer the deed over to the lender. You’ll be out of pre-foreclosure as soon as the transfer goes through.
The benefit to a short sale or deed in lieu is that you might get relocation assistance that can help you transition to renting a home, and you can qualify for a conventional loan within two years compared to seven years after a foreclosure. However, you might still be on the hook for some of what you owed on your mortgage. And if not, you might owe income tax on the amount of the loan that was forgiven.
Right of Redemption After Foreclosure
Some states impose a redemption period that gives you one final chance to pay the debt to your lender’s satisfaction and get your home back. In states that recognize a statutory right of redemption, you can even redeem your home after it has been sold, and you might be able to live in the home during the redemption period.
How To Buy a Home in Pre-Foreclosure
“Pre-foreclosure sale” is another term for a short sale. What this means is that the buyer is behind on their mortgage, and they’re hoping the lender will let them sell the home for less than they need to pay off their loan. Short sales are listed for sale the same way as other home sales, but you stand a better chance of beating out competing buyers if you approach homeowners who’ve not yet listed their homes for sale.
The letters of deficiency that lenders send to delinquent homeowners get recorded with the county where the property is located, which means pre-foreclosures are matters of public record. You can search the notices in person at the county recorder’s office. For more extensive searches, databases like RealtyTrac let you search listed and unlisted pre-foreclosures in any location you choose.
Short sales can provide good value, but you won’t necessarily get a home at a bargain-basement price. Not only does the lender have to give its permission for the seller to sell the home short, it must also approve the purchase price and the terms of the sale. The process can be lengthy, and time is often not on your side because the lender continues with the foreclosure at the same time it considers the seller’s request and negotiates the terms of a pending sale. If it accepts the terms before the foreclosure goes through, you proceed to closing. If the lender forecloses before you can strike a deal, you can try to purchase the foreclosed home at the auction or trustee sale — or just start fresh looking for another house.