What Is Preforeclosure And How Can You Avoid It?

Financial hardship can come out of nowhere, sometimes causing homeowners to start missing mortgage payments because they simply can’t afford to make them.

If this is you and you continue to miss payments, your mortgage servicer will eventually notify you that you’re in preforeclosure. So, what exactly is foreclosure and is it cause for alarm?

It’s important to have a clear understanding of this topic in the event – unlikely as it may be – that you ever find yourself facing the possibility of foreclosure or preforeclosure on your home.

What Does Preforeclosure Mean?

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 have a few options to avoid foreclosure. These include paying what’s owed, working with their lender to modify the mortgage and 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 face 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. Most lenders will do their best to work with you, but they can’t if you don’t communicate with them.

What’s The Difference Between Preforeclosure And Foreclosure?

Preforeclosure is essentially a warning period that gives homeowners an opportunity to rectify their mortgage default before any legal foreclosure proceedings begin. When your home is in preforeclosure, you can still work with your lender to reach a solution – such as a repayment plan or loan modification – to avoid losing your home.

If you don’t work with your lender to reestablish your mortgage, your home will go into foreclosure. Foreclosure is the legal process where your lender takes ownership of the property due to nonpayment, ultimately resulting in the sale of your home to recover the unpaid loan amount.

How Long Is A Home In Preforeclosure?

If you don’t work with your lender or can’t come to a solution and you miss three or more mortgage payments, your lender will likely 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 in all probability go into foreclosure.

Keep in mind that foreclosure laws vary by 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

Putting an end to preforeclosure may not be 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 payments (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 have no options. Most mortgage lenders would much rather work with you than deal with a foreclosed home. Take advantage of that and explore the mortgage options available to you.

Talk With Your Lender About Repayment Plans

Your lender may agree to spread out your past-due payments over several months, adding the amount to your regular monthly bill.

This can be a good option if you had a temporary setback and can now make your regular payments.

However, you need to be sure your budget can handle paying extra. Work with your lender to determine how much you can afford to pay each month.

Ask For Help

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).

A counselor 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. Keep handy your most recent mortgage statement, recent pay stubs, tax returns, bank statements and other monthly bills 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 it was originally outlined in your contract, your lender may be able to modify the conditions of your mortgage.

A loan modification typically involves changing the type, length or interest rate of the loan to lower a borrower’s 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 loan conditions.

Explore Forbearance

With a mortgage forbearance, your lender will allow you to temporarily stop making payments on the loan. However, once the forbearance period ends, you’ll resume monthly payments and typically owe the full amount – in one lump sum – that you would’ve paid during that time.

This may be helpful if you have a temporary loss of income, but you shouldn’t agree to a forbearance plan if you aren’t sure you’ll be able to pay the full amount once the forbearance period ends.

Pursue A Short Sale

A short sale can help you avoid foreclosure, but 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. In this case, the lender agrees to forgive the remaining balance, often writing it off as income to you.

If you’re interested in pursuing a short sale, talk with your servicer first. Then reach out to 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.

Who Buys Preforeclosure Homes?

On the other side of the foreclosure process are buyers hoping to 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 real estate investors and first-home home buyers.

Real Estate Investors

Real estate investors often look for homes they can purchase below market value and then “flip” these homes to sell at a higher price than they paid.

While this can be a profitable strategy, it’s best left to the real estate professionals. Novice flippers may overestimate how much money they can make from their fixer-upper, while underestimating how much time and effort they’ll need to put into it.

First-Time Home Buyers

Cash-strapped first-time home buyers will often 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 won’t be in the best of shape if the previous owner couldn’t afford basic maintenance.

These homes will also typically be sold as is, meaning the property won’t undergo any repairs. This makes them risky for first-timers, who might not have the funds to make necessary fixes.

The Bottom Line

It can be hard to find easy answers when your home is in danger of being foreclosed on. Though options are available to help you avoid foreclosure, some of them will still negatively impact your credit history and credit score. Plus, you may still end up moving out of your home.

Talk with your mortgage lender or servicer early and often. Foreclosure is an expensive process for them, so they would probably rather work with you to help you make your payments.

Interested in finding your most affordable mortgage options? Reach out today to ask questions, learn more and begin the approval process with Rocket Mortgage^®.