What Is Preforeclosure And How Does It Work?

As a homeowner, if you fail to make your mortgage payments, your lender has the right to foreclose on your home, meaning they can take the property and sell it to recover their losses. But there’s another step, known as preforeclosure, that happens after the borrower has stopped making payments but before the lender officially forecloses on the home.

Preforeclosure is an important time because it’s when you still have time to save your home. Keep reading to learn more about how preforeclosure works, your options in preforeclosure and what you should know about buying a house in preforeclosure.

What Happens In Preforeclosure?

Preforeclosure is the first step toward foreclosure. The groundwork for preforeclosure starts as soon as the borrower becomes delinquent on their monthly payments and lasts either until the home goes into foreclosure or the borrower catches up on their payments.

Once someone gets behind on their mortgage payments, the lender contacts them to let them know they’re behind on their payments and to inform them of their options. And once a borrower is about 90 days behind on their mortgage, a lender may send a notice letting them know they’re at risk of foreclosure – some states require such a notice by law. This communication starts the official preforeclosure period and is a borrower’s last chance to take action to save their home.

Unfortunately, preforeclosure can end up costing a borrower even more money. In addition to the payments you’re falling behind on, you may also be accruing fees from your lender, including late fees and inspection fees.

Finally, once a borrower is 120 days – that’s about 4 months – delinquent on their mortgage, the lender may start the official foreclosure process. The lender can seize the home and sell it at an auction to recover their lost money.

How Will I Know I’m In Preforeclosure?

You’ll know you’re in preforeclosure because of notices you get from your lender. Your mortgage lender has a significant financial investment in your home. As a result, you can assume they’ll reach out as soon as you miss your first payment. They may send a late payment notice, possibly attaching a late fee or options to help you get caught up on your payments.

Once you’re about 90 days delinquent on your mortgage, your lender will send a more official notice that signals the official start of the preforeclosure process. Once you reach this point, you’re at risk of losing your home if you don’t act quickly.

How Long Does Preforeclosure Take?

Preforeclosure starts when a lender has issued a notice of default to a borrower, which typically happens when the borrower is 90 days delinquent on their loan. It lasts until the home officially goes into foreclosure, which usually happens around 120 days of delinquency.

Though preforeclosure can last as little as one month, it can also last far longer. The amount of time foreclosure lasts depends on several factors, including the state laws, whether the process is judicial or nonjudicial and more.

What Are My Options If My Home Is In Preforeclosure?

If your home is in preforeclosure and you can’t catch up on your payments, you have a few options to help save either your home or your credit.

Loan Modifications

A loan modification is when a lender agrees to change the terms of your mortgage. It allows borrowers to stay in their homes and allows lenders to get their money without having to go through the foreclosure process.

When you go through loan modification, you and the lender will usually reduce your monthly payment to an affordable amount. In many cases, modification will extend your mortgage term – the lower payments mean it will take you longer to repay the loan. Finally, modification could affect your interest rate.

Short Sale

A short sale is when a borrower sells their home for less than they owe on their mortgage. A short sale is usually a last resort for a borrower who is facing foreclosure or who can’t afford their payments. It helps a borrower avoid the credit impact of a foreclosure.

When you enter into a short sale, it’s important to work with your lender through the process. They may agree to let you only pay back the amount you get from the sale of your home, waiving the rest of the delinquent amount. However, lenders in most states aren’t obligated to do this and could sue you for the difference.

Deed In Lieu Of Foreclosure

A deed in lieu of foreclosure is an agreement between you and your mortgage lender. Rather than going through the entire foreclosure process – and the credit and financial impact that goes with it – you agree to turn over ownership of your home to the lender.

Forbearance

Mortgage forbearance is a temporary pause or reduction of your monthly payments. If you’re worried you won’t be able to make your monthly payments, you can contact your lender and request forbearance. They may be likely to grant it if you’re facing financial hardship, such as job loss, natural disaster or unexpected medical bills.

If your lender grants you forbearance, you’ll still have to repay the full loan balance. In many cases, those missed payments will simply be added to the end of your mortgage term, extending the amount of time it takes you to repay your loan. However, some lenders may require one large payment of the entire amount you missed.

Frequently Asked Questions

How does a preforeclosure affect my credit?

Though preforeclosure doesn’t necessarily appear on your credit report in the same way foreclosure does, you’ll still see a negative impact on your credit. Missed loan payments are reported to credit bureaus, and by the time you reach preforeclosure, your lender has likely already reported several missed payments.

Can I file bankruptcy on my house?

Bankruptcy could help you avoid foreclosure, but only if you file Chapter 13. In a Chapter 7 bankruptcy, you won’t be able to keep your home unless you’re current on your payments. However, a Chapter 13 bankruptcy can help you save your home and catch up on your payments over a period of 3 – 5 years.

Is it possible to avoid foreclosure?

Even if you’ve gone into preforeclosure, it’s not too late to save your home from foreclosure. The most effective way to avoid foreclosure is to get caught up on your mortgage payments. However, your lender may also agree to a loan modification or forbearance to help you avoid foreclosure.

The Bottom Line: Preforeclosure Can Involve Many Options

If you’re in preforeclosure, it means you’re at risk of foreclosure and losing your home. While this sounds scary, you still have options available to you, including modifying your current loan agreement or selling your home to avoid foreclosure.

If you’re facing preforeclosure or are considering buying a preforeclosed home, explore home buying options with Rocket Homes^SM today.