Preforeclosure: What It Is And How It Works
The last few years have brought unprecedented challenges for many. If you haven’t been able to make your mortgage payments, you may have gotten a letter from your lender to let you know that your property is in preforeclosure. If you don’t take action, you may be in jeopardy of losing your home. This is an emotionally and financially devastating predicament.
While preforeclosure is a foreboding term and a serious situation, there are ways to recover. Understanding what foreclosure is and what options borrowers have while in preforeclosure can help them avoid the loss of their home, or salvage what they can of their credit score.
What Is Preforeclosure?
Preforeclosure is the first step in the foreclosure process. It’s designed to give homeowners options to stay in their homes before a foreclosure. Preforeclosure occurs when a homeowner fails to make mortgage payments, prompting the lender to issue a notice of default. This is a legal notice and means that the lender has begun the legal process of foreclosure.
To some people, the term “preforeclosure” refers to a type of real estate listing. Learn more about buying a foreclosed property.
Preforeclosure Vs. Foreclosure: What’s The Difference?
The preforeclosure process is composed of a few steps, the first of which begins when a monthly payment is missed. When a homeowner misses 3 months of mortgage payments, they’re in default of their mortgage. That's the unofficial beginning of the foreclosure process.
When it becomes clear that you can’t make a payment, the best and first action you should take is to contact your mortgage servicer. It may be the last thing you want to do, but in most cases, lenders will work with homeowners while they get back on their feet if they’re notified as soon as the problem arises.
Legal fees make the foreclosure process very expensive, so lenders try to avoid it if possible. Lenders can work with borrowers to arrange a mortgage forbearance – or a pause in payment – and help them devise a repayment schedule that both parties can live with. Keeping the lines of communication open is vital to maintaining that relationship.
Rocket Mortgage® services your mortgage even after it's sold, so homeowners who borrowed from us won’t be alone when they’re faced with a difficult situation like foreclosure. Speak to one of our Mortgage Experts, and they’ll help to connect you with professionals who are best suited to helping you through the process.
How Does The Foreclosure Process Work?
When your lender decides to act on your missed payment, it will file a notice to begin a legal action called foreclosure.
Notice Of Default
Generally, lenders wait for 3 months or more of missed payments before sending the notice of default, which is a written notification to the homeowner that the lender will pursue legal action if the debt is not paid. The lender will also give public notice to the County Recorder’s office to preserve their right to file a lawsuit with the court.
This officially begins the foreclosure process, which can last 3 – 10 months. Homeowners who don’t take action may be in jeopardy of losing their home for good.
Sale Of The Home
The bank’s goal is to get the money they’re owed on the property. If the borrower continues to be unable to make payments and hasn't communicated with the lender, the lender will initiate a judicial foreclosure or execute a deed of trust, or nonjudicial foreclosure. The method used depends on the laws of the state where the property is located.
Often, an auction or trustee sale will take place. In either case, the lender’s goal is to sell the property to recoup what it can of its losses on the loan.
Usually, auctions begin with a minimum bid of the amount owed on the loan. Then, the foreclosed home is sold to the highest bidder. If your home is sold during the auction, you will be required to move out.
What To Do If Your Home Goes Into Preforeclosure
If your home does go into preforeclosure, you have a few available options.
Consider A Loan Modification Or Refinance
Homeowners who have built equity in their home, or whose homes have appreciated significantly in value since purchase, have options – especially if they start the refinance process before they miss a payment. It’s another reason why speaking to your lender as soon as possible is important.
For those farther down the path to foreclosure, another option is to enter into a loan modification. Essentially, it’s a rewrite of a homeowner’s current mortgage without the closing costs. This option will likely extend the life of your loan, but by spreading out the payments over more years, it will also give you more affordable payments.
Try A Short Sale
You also have the option to sell your home during preforeclosure. Most lenders will accept a short sale if you’re in preforeclosure. In a short sale, the buyer pays less than the balance of the mortgage. Because the lender will be accepting less than it is owed, it must approve the short sale. Banks agree to this because it saves them the time and expense of foreclosing on a property.
Get A Deed In Lieu Of Foreclosure
Another way to avoid these proceedings is to surrender your ownership rights to the lender via a deed in lieu of foreclosure. Once the deed is signed, the owner vacates the property. In return, the lender is free to sell the property immediately. In some cases, the lender can still seek reimbursement of any losses on the sale from the homeowner, so borrowers should ask about the lender's policies before signing away their rights.
This option can be attractive to people who want to avoid a drawn-out foreclosure process and a big hit to their credit score.
Borrow If You Can To Catch Up On Missed Payments
For borrowers who hate to ask for help, asking friends and relatives for a loan will be unappealing, but the best way to get out of preforeclosure is by catching up on all missed payments. Once the mortgage is brought current, many lenders will stop the preforeclosure process.
It may be uncomfortable, but if borrowing is possible, it’s better to do it before the foreclosure process begins to reduce the hit on your credit history.
The Bottom Line: Preforeclosure Can Be Stopped
Homeowners in preforeclosure have several options to get out of home debt, and often without a huge hit to their credit score.
If you’re a homeowner in preforeclosure, you should speak with your mortgage servicer today. If you’ve already gone beyond preforeclosure, learn more about how to stop foreclosure in our Learning Center.