Preforeclosure: What It Is And How It Works
Molly Grace6-minute read
March 29, 2023
Sometimes, circumstances change your plans. For example, financial hardship can come out of nowhere, causing you to start missing mortgage payments because you simply can’t afford to make them.
If you continue to miss payments, your mortgage servicer will notify you that you’re in preforeclosure, and it can feel like the end of the world. But you aren’t out of options just yet.
What Is Preforeclosure?
Preforeclosure is the first step in a foreclosure proceeding brought on because the homeowner has failed to make 3 – 6 months’ worth of payments. Homeowners in preforeclosure typically have a few options to avoid foreclosure, including paying what’s owed, working with their lender to modify the mortgage to reduce their monthly payment, or settling the debt through a short sale or deed-in-lieu-of-foreclosure.
When you take out a mortgage, you agree to make payments according to your contract. Depending on your contract, your lender may give you a short grace period after your monthly payment is due – usually 15 days – before you’ll be considered late and charged fees.
When you become late, or delinquent, on your mortgage, your lender will begin contacting you by letter or phone to try to work out a solution that doesn’t involve you losing your home to foreclosure.
It’s very important that you stay in contact with the lender during this period. They’ll do their best to work with you, but they can’t if you don’t pick up the phone.
How Long Is A Home In Preforeclosure?
If you don’t work with your lender or aren’t able to come to a solution and miss three or more payments, your lender will file a notice of default, which is a public record stating that your loan is in default. This is the beginning of the preforeclosure process and tends to be about 1 – 3 months long.
Once this happens, consider this your “last call” to take action to avoid foreclosure. If you decide not to take action, your mortgage will likely go into foreclosure. Let’s take a look at what taking action looks like if your home is in preforeclosure.
Keep in mind that foreclosure laws vary from state to state, so the timeline might be slightly different for you. If you want to know exactly what the law says in your state, check with your state’s housing office or consult an attorney. Your loan documents will show default information specific to your loan.
How To Avoid Foreclosure As A Homeowner
For most people, putting an end to preforeclosure isn’t as simple as paying back everything you’re late on in one lump sum and moving on.
If you’re still suffering from the same circumstances, such as a job loss, that caused you to initially go delinquent on your mortgage, you likely won’t be able to liquidate your mortgage debt all at once – even if your lender offers this option.
When you pay off past-due mortgage bills (and any fees incurred) to make your loan current, it’s called reinstating the loan.
However, just because you can’t pay everything off right away doesn’t mean you don’t have options. Mortgage lenders would much rather work with you than foreclose on your home. Take advantage of that and explore whether any of these options make sense for you.
Talk With Your Lender About Repayment Plans
Your lender may agree to spread out your past-due payments over the course of several months, adding the amount to your regular monthly bill.
This can be a good option if you had a temporary setback and are now able to make your regular payments but having trouble paying back the missed payments.
However, be sure your budget can handle the extra monthly payments. Work with your lender to determine how much you can afford to pay each month. Don’t agree to pay more than what you know you can afford.
With this option, you’ll be able to stay in your home and avoid foreclosure (if you follow the terms of the repayment agreement).
Ask For Help
We all need a little bit of help sometimes. If you aren’t sure of your options, consider reaching out to a housing counseling agency that’s approved by the U.S. Department of Housing and Urban Development (HUD). You can search for a counselor online or call (800) 569-4287.
These counselors will evaluate your situation and help you determine the best course of action. When you call, be prepared to provide some basic information on your financial situation. You may want to have your most recent mortgage statement, recent pay stubs, tax returns, bank statements and other monthly bills with you so you can better answer their questions.
Make sure the counselor you’re contacting is HUD-approved. Scammers often prey on homeowners going through the foreclosure process, and even some legitimate businesses may charge you for services you can get for free from HUD.
Discuss A Loan Modification With Your Lender
If you can’t pay your loan as was originally outlined in your contract, your lender may be able to modifying the terms of your mortgage.
A loan modification typically involves changing the type, length or rate of the loan to lower your monthly payments. This could mean the lender extends the life of the loan, giving you more time to pay it off. Or it could mean the lender lowers your interest rate or moves you from an adjustable rate to a fixed rate, so you have a predictable monthly payment.
These options can be helpful if you need a longer-term solution and aren’t eligible to refinance into a new loan with better terms.
With forbearance, your lender will allow you to temporarily stop making payments on the loan. However, once the forbearance period ends, you’ll not only resume monthly payments, but you’ll typically owe the full amount – in one lump sum – of what you would have paid during that time.
This may be helpful if you have a temporary loss of income, but you should be careful about agreeing to a forbearance plan if you aren’t sure you’ll be able to pay the full amount once the forbearance period comes to an end.
Pursue A Short Sale
A short sale can help you avoid foreclosure, but unfortunately, you’ll give up your home in the process. However, if you’re living in a home that you can no longer afford, a short sale may be your best alternative to foreclosure.
When you sell your home for less than you owe on it, it’s called a short sale. If your lender agrees to this, you may be able to satisfy your mortgage debt by selling your home and using the proceeds to pay off as much of the loan as possible, with the lender agreeing to forgive the remaining balance, often writing it off as income to you.
If you’re interested in pursuing this option, talk with your servicer first, and then a real estate agent who has experience in short sales.
Sign A Deed-In-Lieu-Of-Foreclosure
With a deed-in-lieu-of-foreclosure, you exchange the deed to your home for forgiveness of your mortgage debt. You lose your home to the lender, but you avoid the foreclosure process.
If you want to explore this option, talk with your mortgage lender about whether they’ll accept a deed-in-lieu agreement.
How Do You Buy A Preforeclosure Home?
On the other side of the foreclosure process are buyers who are hoping to potentially get a good deal on a home being sold for less than other homes on the market. Preforeclosures that go into foreclosure are generally popular with the following two types of buyers.
Real Estate Investors
Real estate investors often look for homes they can purchase below market value and then “flip” to sell at a higher price than they paid.
While this can be a profitable strategy, it’s best left to the professionals. Novice flippers often end up underestimating how much time and effort they’ll need to put into their fixer-upper, while overestimating the amount of money they can make from it.
First-Time Home Buyers
Often, cash-strapped first-time home buyers will look at preforeclosures and foreclosures to see if they can get into a home at a bargain price.
However, upfront savings can often turn into long-term headaches. Homes going through the foreclosure process might not be in the best of shape because the owner isn’t able to afford basic maintenance. These homes will also typically be sold as-is, meaning no repairs will be done to the property. This makes them risky for first-timers, who might not have the funds to make necessary fixes.
The Bottom Line: A Home In Preforeclosure Can Make For A Difficult Time Requiring Difficult Decisions
It’s hard to find easy answers when your home is in danger of being foreclosed on. Though options are available to help you avoid foreclosure, many of them will still negatively impact your credit history and credit score and may still mean moving out of your home.
The best action to take if you’re having trouble making your mortgage payments or believe you’ll soon have trouble is to talk with your mortgage lender or servicer early and often. Foreclosure is an expensive process for them, and they would rather work with you to help you make your payments.
It’s easy to feel ashamed and want to bury your head in the sand when you get the call or letter from your mortgage lender letting you know you’re late on your payments. But remember that there’s nothing shameful about experiencing hardship. Don’t be afraid to ask for help and find a preforeclosure solution that works for you.
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