• A pre-foreclosure is a legal proceeding that occurs before a lender repossessing a property.
• If a homeowner misses a certain number of mortgage payments, the lender may issue a notice of default, initiating pre-foreclosure proceedings.
During pre-foreclosure, mortgage borrowers may still have options to save their homes. A lender must go through a court proceeding to finalize a foreclosure and eviction notice. Some lenders will allow you to make back payments to exit pre-foreclosure.
How Pre-foreclosure Works
When a homebuyer takes out a loan to acquire a property, they sign an agreement with the lending institution to repay the mortgage loan, typically in monthly instalments, according to the terms of the contract. Typically, mortgage payments are structured to cover a portion of both principal and interest.
Default on a standard mortgage contract typically occurs when a borrower fails to make payments for three consecutive months. The lender is then typically contractually authorized to initiate pre-foreclosure. When this occurs, the borrower receives a copy of the notice of default, which is also made available to the public through a court filing. This action initiates the pre-foreclosure process, which can take anywhere from a few weeks to over a year, depending on the state and court proceedings.
There are a number of standard steps involved in the foreclosure process. The default notice initiates the proceeding in the pre-foreclosure phase. In general, a lender's lien on a property requires court approval, which must be granted by a judge.
To avoid paying what can be substantial foreclosure proceeding costs, lenders are frequently more willing to negotiate backdated payments and possible loan modifications during the pre-foreclosure phase. If foreclosure is granted and an eviction notice is authorized, the lender may proceed to a public auction or trustee sale.
Short Sales of Pre-foreclosure Homes
A borrower's sale of a home prior to foreclosure is typically referred to as a short sale. The sale can be conducted privately between the homeowner and the buyer, but the bank must typically approve the buyer's offer before the sale can be finalized. Because the purchase price might well be less than the outstanding loan balance, a short sale is possible.
Remember that not all short sales constitute pre-foreclosures. Before entering pre-foreclosure, homeowners who are aware of their difficulties may choose to sell their homes by any means possible. A buyer can have a pre-foreclosure home inspected prior to submitting an offer. The buyer may be an investor who intends to purchase the property for less than its fair market value (FMV) and resell it for a profit.
If the homeowner lists the property with an agent, prospective buyers will contact the listing agent. The lending bank will likely need to be involved in any short sale and may hire one or more real estate brokers or attorneys, especially to prepare a broker price opinion.
Homeowners facing foreclosure can contact the federal Making Home Affordable Program at 888-995-HOPE (888-995-4673) for assistance in keeping their home or, if that is not possible, in finding a new home.
Advantages and Disadvantages of Pre-foreclosure Sales
During the pre-foreclosure phase, a home can be sold, which can be advantageous for all parties. By selling, the homeowner avoids the damage to their credit history that a foreclosure would cause. Typically, the buyer can acquire the property for less than market value. The lending institution is not responsible for paying foreclosure costs or selling the property.
However, selling a property on one's own is not always simple, as the seller must adhere to legal and disclosure requirements. A buyer of a pre-foreclosure home must be aware of any property liens or unpaid taxes on the home, as these may be transferred to the new owner without full disclosure or properly documented clauses.
If during the pre-foreclosure period the homeowner fails to make the past-due (and ongoing) mortgage payments, negotiate a modification, or sell the home, the lender will eventually be granted permission to place a lien on the property. When this occurs, they are able to evict the owner and sell the property. At this point, the bank owns the property and is more likely to attempt to sell it at a reduced price than to pay its ongoing expenses, such as taxes and insurance.
Pros
• By Selling the home or property may protect the homeowner from going to bankruptcy.
• After the sale, the homeowner may be able to purchase an affordable home.
Cons
• During the pre-foreclosure of the home it may be difficult to sell ;
• Failure to make past-due payments can result in foreclosure;
• Having a home in pre-foreclosure can be emotionally taxing.
COVID-19 Mortgage Relief
In 2020 and 2021, a series of measures were taken to protect struggling homeowners affected by the COVID-19 pandemic.
• The Coronavirus Aid, Relief, and Economic Security (CARES) Act became law on March 27, 2020, instituting a moratorium on evictions and foreclosures for government-backed mortgages until December 31, 2020.
• Mortgage relief has been extended until January 31, 2021.
•On his first day in office, President Joe Biden extended the moratorium by executive order until at least March 31, 2021.
•The moratorium was extended to June 30, 2021, on February 16, 2021.
• On June 24, it was extended until July 31, 2021, for the final time.
• As of 1 March 2022, only certain states, including Washington, D.C., have extended the moratorium (extended to Sep. 30, 2022).
The executive order also made eligible owners of multifamily properties eligible for deferral. If a claim is approved, government-backed mortgage borrowers may defer payments for up to 360 days, avoid eviction from their home, avoid late payment fees, defer any foreclosure proceedings already in progress, and stop the pre-foreclosure phase for new proceedings.
Additionally, private lenders were instructed to collaborate with borrowers, making loan modifications more accessible. In 2021, mortgage rates fell to all-time lows, making refinancing a viable option for any mortgage borrower who has not refinanced within the past few months and is contractually permitted to do so under the terms of their current mortgage. However, according to Federal Reserve Chairman Jerome Powell, interest rates will increase in the spring of 2022.
What Is the Meaning of Pre-foreclosure?
Pre-foreclosure is an action taken by a lender to attempt to collect mortgage arrears. A pre-foreclosure is an indication that a foreclosure may occur if debts are not settled.
Is My Home in the Pre-Foreclosure Stage?
You will receive a legal notice of default before your home enters pre-foreclosure, alerting you to the risk of your home entering pre-foreclosure. If you have not made mortgage payments for more than three months, it is likely that your home will enter pre-foreclosure.
Difference Between Foreclosure and Pre-foreclosure
Pre-foreclosure occurs when a notice of default is served on the homeowner after court approval. During this stage, a homeowner may be able to negotiate with the lender to save the property, typically by paying off their debts. A foreclosure occurs when the lender obtains the authority to serve the delinquent borrower with a notice of foreclosure eviction and then proceeds to sell the property at public auction.
The Bottom Line
Pre-foreclosure can be a vital phase because the lender may be willing to negotiate the borrower's delinquent debt. Before a property reaches a final foreclosure eviction, the borrower often has a final opportunity to potentially reverse the default status by negotiating a modification, making up late payments, or opting to sell the property.
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