If a borrower has defaulted on mortgage payments for a certain period, a property will enter preforeclosure. Preforeclosure is the crucial period when the borrower has missed sufficient payments to be considered in default. The lender has not yet foreclosed on the home or made arrangements that might allow the homeowner to stay put. Preforeclosure is the last moment you may act to prevent property loss or long-lasting serious credit damage. Read on to understand the steps you can take if faced with preforeclosure.
Key Takeaways
- Understanding the pre-foreclosure process is crucial for homeowners facing financial difficulties and possible foreclosure on their property.
- It is important for homeowners to take proactive steps, such as communicating with their lender and exploring available resources, to prevent foreclosure and protect their financial well-being.
- Exploring options like loan modification, mortgage refinance, or deeds in lieu of foreclosure can help homeowners avoid the negative impact of foreclosure on their credit score.
Understanding How Preforeclosure Works
When a buyer takes out a mortgage, the borrower agrees to repay the lending institution according to a specific contractual agreement, usually in monthly installments. In most standard mortgage contracts, preforeclosure starts if the borrower fails to pay for three consecutive months.
Preforeclosure occurs when a borrower has defaulted on a mortgage loan, exceeding the contractual maximum delinquent payments. At this stage, the lender will file a notice of default on the property in preforeclosure. A judge must give court approval for the lien of a property. Then, the borrower will receive a copy of a notice of default, recorded in the public record with a court filing. How long the preforeclosure process takes depends on the state and individual proceedings. It can take anywhere from a few weeks to a year or more.
You will receive a notice of preforeclosure from the lender, indicating that it is pursuing legal action toward foreclosure. If you find yourself in preforeclosure, you have a few options, from negotiating with the lender to borrowing funds or making a short sale.
At this stage, lenders are usually more open to negotiating backdated payments or loan modification to avoid costly foreclosure proceedings. Below, you'll find an overview of six possible actions you could take.
What’s the Difference Between Preforclosure and Foreclosure?
In the preforeclosure stage, the property is not yet formally in foreclosure. The homeowner still has options to negotiate with the lender, modify the loan, create a deed in lieu of foreclosure, make missed payments or other options. Once the property is formally in foreclosure, the lender has taken possession of it and will plan to sell it in auction or a short sale.
How to Handle Preforeclosure Situations for Your Home
If you find your home in preforeclosure, you have various options. Here are the main ideas to consider.
1. Borrow Money from Trusted Family or Friends
Borrowing enough from trusted family or friends to catch up on missed payments can be a simple option to avoid negotiations with the lender and avert foreclosure. To protect the relationship with your family members or friends, write up the loan agreement and repayment terms and stick to them.
Pros:
- Easy
- Fast solution
- Avoid foreclosure
Con:
- May strain relationships
2. Get a Loan Modification
A mortgage loan modification is a change to your loan terms, such as increasing the repayment years to reduce your monthly payment to an amount you can afford. A loan modification is used as a type of loss mitigation.
Pros:
- Take control of your mortgage
- Reduce monthly payments
- Avoid foreclosure
Cons:
- May reduce the principal on the loan
- May increase the years to pay off the loan
3. Apply for Mortgage Refinance
A mortgage refinance means you'll take out a new loan with new terms, paying off the existing loan in full and restarting payment on a new mortgage with possibly longer terms or lower monthly payments. You'll have to pay closing costs or higher interest rates with a mortgage refinance.
Pros:
- Extend loan terms
- Relieve financial pressure
- Take control of your mortgage
- Avoid foreclosure
Cons:
- May reduce the principal on the loan
- You'll have to pay closing costs
- You may get a higher interest rate
- More difficult to qualify when you're in preforeclosure
5. Consider Short Sales
A short sale is an option for homeowners to sell their home. With a short sale, you'll sell the home for less than is owed on the mortgage loan. Usually, a short sale is an option for homeowners in difficult financial situations who don't have another option to address preforeclosure.
The mortgage lender gets all of the proceeds of a short sale. Then, the lender will forgive the difference on the mortgage or require the borrower to pay the remaining mortgage balance, if any, via a deficiency judgment.
6. Consider Chapter 13 Bankruptcy
Chapter 13 bankruptcy is an option that enables people with regular income to plan to repay their debts. With this option, you'll propose a repayment plan to make installments to creditors over three to five years. There are pros and cons to Chapter 13 bankruptcy.
Pros:
- Stop foreclosure proceedings
- Reschedule other secured debts
Cons:
- Your combined total secured and unsecured debts must be less than $2.75 million
- Will affect your credit score
7. Obtain a Deed In Lieu Of Foreclosure
A deed in lieu of foreclosure is a legal instrument in which the homeowner passes the deed to the lender to satisfy the loan and avoid default or foreclosure proceedings. You can also find Fannie Mae HomePath homes that were forfeited through a deed in lieu of foreclosure for investment or to purchase a new home.
Pros:
- Stop foreclosure proceedings
- Clear mortgage debts
- Preserve your credit score
Con:
- You'll have to give up the home and move out
What Happens if Your Property Is Foreclosed On?
If your property is foreclosed on, it will be seized by the lender and sold at auction to recoup the outstanding mortgage debt. The proceeds from the sale will go toward paying off the debt, and the homeowner may still owe any remaining balance. How long foreclosure proceedings take varies by state and individual situations or considerations specific to the property.
Taking Action to Prevent Preforeclosure
While preforeclosure can be scary, you have options to prevent the loss of your home or entering the foreclosure process. If you have missed two mortgage payments, consider some of the options on the list above before entering preforeclosure proceedings. You can borrow money from a family member or friend, negotiate with the lender or consider a refinance to prevent preforeclosure.
After the property is in preforeclosure, you still have options. Act swiftly and carefully consider options or speak with the lender and a real estate attorney to protect your home. Ready to get started? Find the best mortgage refinance companies here.
Frequently Asked Questions
How long does the preforeclosure process typically last?
The preforeclosure process can take a few weeks to more than a year. The length of preforeclosure varies by state and individual situation.
Will my credit be affected during preforeclosure?
Yes, any late or missed payment will affect your credit score. Preforeclosures will usually affect your credit score, but how much and for how long depends on how you remedy the situation and whether the property goes into foreclosure.
Can I rent out my property during preforeclosure?
Yes, you can rent a property during preforeclosure. As long as the house has not been sold, you have the right to rent the property if you disclose the preforeclosure or foreclosure to the potential tenant.
About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about wealth building and responsible debt for financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgages, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she regularly contributes to Benzinga.