What is Pre-Foreclosure?
Pre-foreclosure is the initial phase of a legal process that may result in a property being reclaimed due to the owner’s default on their mortgage. This stage begins when the lender files a notice of default because the owner hasn’t adhered to the agreed payment schedule.
A notice of default alerts the homeowner that foreclosure proceedings are underway. However, there are options during this period that may help the homeowner avoid foreclosure altogether. Mortgage lenders are often open to negotiation during pre-foreclosure to potentially resolve the issue.
Key Takeaways
- Pre-foreclosure is a preliminary legal process before a home is repossessed by the bank.
- A homeowner receives a notice of default if delinquent on certain payments, starting the pre-foreclosure process.
- Borrowers have strategies available to remedy the situation and retain their homes during pre-foreclosure.
- Legal proceedings must be followed for a lender to finalize a foreclosure and eviction notice.
- Lenders may allow back payments to exit pre-foreclosure.
How Pre-Foreclosure Works
Upon taking a mortgage to buy a property, the borrower commits to repaying the loan via a structured agreement, typically with monthly payments covering both principal and interest.
Usually, missing three consecutive monthly payments triggers a default under standard mortgage contracts. When this occurs, the lender issues a notice of default, which is publicly recorded through the court system. This kicks off the pre-foreclosure process, which can extend from weeks to more than a year, depending on state laws and court proceedings.
Foreclosure follows a certain process, starting with a notice of default during the pre-foreclosure phase. Court approval, often required, allows lenders to proceed with a foreclosure and issue an eviction notice if a settlement isn’t reached.
Lenders may prefer negotiating back payments or loan modifications in pre-foreclosure to avoid hefty foreclosure costs. Should foreclosure occur, the property may be sold via public auction or trustee sale.
Short Sales of Pre-Foreclosure Homes
A short sale occurs when a borrower agrees to sell a pre-foreclosure home for less than the remaining mortgage balance. The sale often needs the lender’s approval to finalize. While not all short sales are pre-foreclosures, they offer an avenue for borrowers to avoid full foreclosure.
Investors may inspect pre-foreclosed homes before purchasing them below market value, aiming for a profit upon resale.
When homeowners list their property through an agent, prospective buyers interact with the agent. Banks, in turn, might involve brokers or attorneys to facilitate the process.
Advantages and Disadvantages of Pre-Foreclosure Sales
Pre-foreclosure sales can benefit all involved parties. Homeowners may avoid severe credit impacts, buyers can often secure properties below market value, and lenders save on foreclosure costs.
However, selling during pre-foreclosure can be complex, with legal and disclosure considerations. Buyers must be wary of any outstanding liens or unpaid taxes.
Pros:
- Selling may prevent severe credit damage.
- Homeowners may soon own an affordable home.
- Lenders avoid foreclosure costs.
Cons:
- Selling isn’t easy due to detailed procedural requirements.
- Failure to cover back payments can lead to foreclosure.
- Emotional stress associated with pre-foreclosure.
COVID-19 Mortgage Relief
In response to the COVID-19 pandemic, several measures were introduced to support struggling homeowners:
- The CARES Act introduced a temporary moratorium on evictions and foreclosures for government-backed mortgages.
- The moratorium received extensions until September 30, 2022, for certain states.
- Pandemic-related provisions allowed qualifying property owners to defer mortgage payments and avoid late fees.
What Does Pre-Foreclosure Mean?
Pre-foreclosure represents the initial phase in seeking recovery of mortgage debts by lenders. It’s a precursor to foreclosure if debts go unresolved.
Is My House in Pre-Foreclosure?
You will receive a legal notice of default before entering pre-foreclosure. Typically, missing over three consecutive months of mortgage payments triggers this status.
What’s the Difference Between Foreclosure and Pre-Foreclosure?
Pre-foreclosure: Initiated by a notice of default, court-approved. Offers an opportunity to negotiate and settle debts.
Foreclosure: Finalized with eviction notice, directing properties to the public auction if debts remain unresolved.
The Bottom Line
Pre-foreclosure serves as a critical phase where last-minute negotiations can occur between the lender and borrower. It’s often the borrower’s final chance to rectify default status through payment, negotiation, or selling the property before full foreclosure ensues.
Related Terms: foreclosure, notice of default, short sale, loan modification, property lien.
References
- Electronic Code of Federal Regulations. "§203.606 Pre-Foreclosure Review".
- SF Gate. “How Long Can You Be in Pre-Foreclosure?”
- U.S. Department of Housing and Urban Development. “Complaints”.
- Consumer Financial Protection Bureau. “Submit a Complaint”.
- Consumer Financial Protection Bureau. “What Is a Short Sale?”
- MakingHomeAffordable.gov. “Find a Housing Counseling Expert”.
- Congress. “H.R.748 - CARES Act”.
- U.S. Department of Housing and Urban Development. “Biden Administration Authorizes Extension of Federal Housing Administration Single Family Foreclosure and Eviction Moratorium”.
- The White House. “Fact Sheet: Biden Administration Announces Extension of COVID-19 Forbearance and Foreclosure Protections for Homeowners”.
- The White House. “Fact Sheet: Biden Administration Announces Additional Actions to Prevent Foreclosures”.
- National Consumer Law Center. “COVID-19 State Foreclosure Moratoriums and Stays”.
- Freddie Mac. “Mortgage Rates”.
- Washington Post. “Fed Ready to Tackle Inflation With Interest Rate Increase in March, Pointing to Strong Job Growth Amid Pandemic”.
