What Is Pre-foreclosure?

What does pre-foreclosure mean? The term refers to the legal situation a property is in during the early stages of being repossessed. It begins when the lender files a notice of default on the property because the owner has not been making mortgage payments. This notice informs the owner that the lender will pursue legal action toward foreclosure if the mortgage debt isn’t paid. The owner can either reverse the default status by making up the late payments or sell the property before it goes into foreclosure.

Key Takeaways

  • Pre-foreclosure begins when the lender files a default notice on the property because the homeowner is at least three months delinquent with mortgage payments.
  • A homeowner might have the option of selling his or her pre-foreclosure home as a short sale subsequent to lender approval.
  • If the homeowner does not cover the past due payments and does not sell the home during the pre-foreclosure period, the lender will eventually sell the property, typically at auction.

The Pitfalls Of Buying A Foreclosed House

How Pre-foreclosure Works

When a homebuyer takes out a loan to purchase a property, they sign a contract with the lending institution to repay the mortgage loan in monthly installments. These monthly installments cover a portion of the principal and interest payments on the mortgage. A homeowner is said to be in default if they fail to make payments for at least three months. At that point pre-foreclosure can begin.

The owner receives a copy of the notice of default, which is also made a matter of public record. This action begins the pre-foreclosure process, which can take anywhere from weeks to more than a year, as it varies by state. A public auction or trustee sale is arranged once pre-foreclosure ends.

Advantages and Disadvantages of Pre-foreclosure

A home can be sold during the pre-foreclosure phase, and that can be a win for all three parties involved. By selling, the homeowner is able to avoid the damage that a foreclosure would have on their credit history. The buyer can usually snag the property for below market value. The lending institution doesn’t have to shoulder the costs of a foreclosure.

However, buyers of pre-foreclosed homes should be aware of any property liens or unpaid taxes on these homes because these can potentially become their responsibilities after they purchase the properties. The buyer should also factor in the costs of repairs and renovation if the pre-foreclosed home is in a poor state or risk ending up with excessive expenditures.

If the homeowner does not cover the past-due (and ongoing) mortgage payments or sell the home during the pre-foreclosure period, the lender will eventually sell the property, typically at auction. The bank owns the property at this point and is more likely to try to sell the property at an even lower price rather than maintain its ongoing expenses, such as taxes and insurance.

Homeowners facing foreclosure can contact the federal Making Home Affordable Program at 888-995-HOPE (888-995-4673) for assistance with keeping their homes or relocating to a new home if that’s not possible.

Special Considerations

A pre-foreclosure home that goes up for sale is typically referred to as a “short sale.” The sale can be a private transaction between the homeowner and the buyer, but the buyer’s offer must be approved by the bank before the sale can be finalized. The purchase price may be less than the outstanding loan balance, which is why the sale is said to be “short.” Not all short sales are pre-foreclosures, however. Homeowners who know they are in trouble sometimes elect to sell their properties by any means possible before reaching pre-foreclosure.

A pre-foreclosed home can be inspected by the buyer before making an offer on it. The buyer could be an investor looking to purchase the property for less than its fair market value and then sell it at a higher price for a profit.

If the homeowner lists the property for sale through a real estate agent, prospective buyers will contact the listing agent. The lending bank must approve any short sale and will hire one or more real estate brokers to prepare a broker price opinion—an estimated market value based on an analysis of similar homes that have recently sold in the local market. The estimated market value helps the bank decide whether the proposed sales price is acceptable.

Mortgage Relief Due to the COVID-19 Pandemic

Thanks to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by the president on March 27, 2020, an eviction and foreclosure moratorium is in place at least through June 30, 2020. During that time homeowners will not be charged late payment fees or evicted from their homes, and lenders will suspend any foreclosure proceedings already in process and begin no new ones. In addition, all federally backed mortgages are eligible for six months of forbearance, with a six-month extension of that also possible. At the end of your forbearance period, your lender must discuss options with you for making up the deferred payments.