What Is Pre-Foreclosure?
Pre-foreclosure refers to the beginning phase of a legal proceeding that ultimately can conclude in property being repossessed from a defaulted borrower. In pre-foreclosure, the lender files a notice of default on the property because the borrowing owner has exceeded the contractual terms for delinquent payments. A notice of default informs the borrowing owner that the lender is pursuing legal actions toward foreclosure.
Pre-foreclosure can be an important phase because the lender may be open to a last-rights negotiation on delinquent debt for the borrower. The borrower often has a final opportunity to potentially reverse the default status by making up late payments, negotiating a modification, or possibly opting to sell the property before it reaches a final foreclosure eviction.
- Pre-foreclosure usually begins when the lender files a default notice on the property because the homeowner has exceeded the contractual terms for delinquent payments (often three months of delinquency or nonpayments).
- In pre-foreclosure, mortgage borrowers may still have some options, including making backdated payments, negotiating a modification, or arranging a short sale.
- Government-backed mortgages have a moratorium for forbearance, evictions, and foreclosure proceedings due to the coronavirus pandemic. The federal moratorium has been extended until at least March 31, 2021. States may also have their own foreclosure moratoriums.
The Pitfalls Of Buying A Foreclosed House
How Pre-Foreclosure Works
When a home buyer takes out a loan to purchase a property, they sign a contract with the lending institution to repay the mortgage loan according to a contractual agreement, typically with monthly installments. Monthly payments are usually structured to cover a portion of principal and interest payments on the mortgage.
Standard mortgage contracts are often structured to be in default if a borrower fails to make payments for three consecutive months. At that point, the lender is usually contractually authorized to begin pre-foreclosure.
The borrower receives a copy of a notice of default, which is also made a matter of public record, often through a filing with the court. This action begins the pre-foreclosure process, which can take anywhere from weeks to more than a year, as it varies by state and is subject to a court proceeding. A lender is obligated to go through a court proceeding to finalize a foreclosure and eviction notice.
There are several standard steps to a foreclosure proceeding. The notice of default kicks off the proceeding in the pre-foreclosure phase. In general, the lender needs court approval, which must be given by a judge, for their lien on a property.
Lenders are often more willing to negotiate backdated payments and possible loan modifications in the pre-foreclosure stage of a proceeding to avoid paying what can be extensive foreclosure proceeding costs. If foreclosure is granted and a foreclosure eviction notice is authorized, then the lender can move toward a public auction or trustee sale.
Advantages and Disadvantages of Pre-Foreclosure
A home can be sold during the pre-foreclosure phase, and that can be a win for all of the 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 pay the costs of a foreclosure proceeding or sell the property itself.
However, selling a property independently is not necessarily easy, particularly since there are legalities and disclosure requirements by which the seller must abide. Buyers of pre-foreclosed homes will need to be aware of any property liens or unpaid taxes on a home, because these potentially could be transferred to the new owner without full disclosure or properly documented clauses.
If the homeowner does not make the past-due (and ongoing) mortgage payments, negotiate a modification, or sell the home during the pre-foreclosure period, then the lender eventually will be granted authorization of their lien on the property and can evict the owner, subsequently taking action to 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 home—or, if that’s not possible, with relocating to a new home.
A pre-foreclosure home that a borrower puts 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 usually 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.”
Keep in mind that not all short sales are pre-foreclosures. Homeowners who know they are in trouble sometimes elect to sell their properties by any means possible before reaching pre-foreclosure.
A buyer can have a pre-foreclosed home inspected 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.
Short sales on real estate can be a good deal for a buyer, but buyers should ensure that all legalities are adhered to.
If the homeowner lists the property for sale through a real estate agent, then prospective buyers will contact the listing agent. In any short sale, the lending bank will likely need to be involved and may hire one or more real estate brokers or attorneys of their own, particularly to prepare a broker price opinion.
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, then there are steps you can take. One such step is to file a report with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).
Mortgage Relief Due to the COVID-19 Pandemic
Thanks to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, an eviction and foreclosure moratorium was put in place for government-backed mortgages through Dec. 31, 2020, and then extended through Jan. 31, 2021. The moratorium was further extended by President Joe Biden, by executive order on his first day in office, until at least March 31, 2021. On Feb. 16, 2021, the moratorium was extended to June 30, 2021. The January executive order also made qualifying multifamily property owners eligible for forbearance, which has since been extended through Sept. 30, 2021. If a claim is approved, then government-backed mortgage borrowers can defer payments for up to 360 days, avoid late payment fees, avoid eviction from their home, defer any foreclosure proceedings already in process, and halt the pre-foreclosure phase for any new proceedings.
Private lenders have been advised to work with borrowers, making loan modifications more easily accessible. Rates have also fallen to unprecedented lows, making refinancing a viable option for any mortgage borrower who hasn’t previously refinanced within the last few months and is contractually allowed to do so under their current mortgage terms.