By Jeanne Sager | Nov 27, 2017
Don’t let the “pre” part of “pre-foreclosure” fool you: Pre-foreclosure is serious. While your house won’t be taken from you during pre-foreclosure, it’s the first step in the whole foreclosure process, which notifies homeowners their property is in danger of getting repossessed.
What is pre-foreclosure?
If you fall two to three months behind on your mortgage, your lender is typically going to come calling with a default notice on the property; this is how pre-foreclosure begins. A default notice lets homeowners know their lender will start the foreclosure process if the debt is not paid promptly.
Pre-foreclosure is essentially the period of time after your lender has notified you that it plans to foreclose on your home, but before the process has been completed and the lender has taken full possession of the home, says Bill Richardson, district sales manager for The Keyes Company, an independent brokerage in Boca Raton, FL.
“Unless you can negotiate a loan modification or come current on your mortgage, you will not keep your home,” Richardson warns. “Either the bank forecloses on it, or you negotiate a deed in lieu of foreclosure or a short sale.”
Loan modification in pre-foreclosure
A loan modification is a popular means to save your house when you’re struggling to pay your monthly mortgage. You can request that your lender extend the length of your loan, so you’re responsible for paying less each month. Lenders may also opt to lower the interest rate or allow you to tack your missed payments onto the end of your loan.
If it looks like a modification can be arranged, it’s in a lender’s financial best interest to work with homeowners to keep them in their home. Then the bank doesn’t have to go through the hassle of completing the foreclosure process, evicting the homeowners, and likely having to sell the home to get back its investment. If a loan modification deal is reached, then pre-foreclosure ends, and the homeowners go back to making regular payments on their loan.
Deed in lieu of foreclosure
When a loan modification isn’t an option, pre-foreclosure can also involve a deed in lieu of foreclosure, Richardson says. That means homeowners who are behind on their mortgage hand over their house’s deed to the bank to settle their debt … and walk away.
A lender has to agree to the option, and whether or not a bank will agree to it depends on a number of variables, including the current housing market. In a rising market, Richardson says, banks have time on their side and the possibility of selling your home for more than they’d get from your paying off your mortgage anyway.
If a lender agrees to a deed in lieu of foreclosure, pre-foreclosure ends. The process doesn’t reach official foreclosure.
Short sale: Selling a home in pre-foreclosure
If a loan modification can’t be worked out, another step in the pre-foreclosure process may be a short sale—essentially selling the home to satisfy the bills with the bank.
To negotiate a short sale, homeowners need to talk to their lender about selling their home. If the lender agrees, then the homeowners contact a real estate agent to help them find a buyer, and the bank gets to keep the money for the sale.
“Almost every short sale is in pre-foreclosure,” says Richardson. And short sales can be attractive to lenders as the homeowner will be doing the hard work of trying to find a buyer.
If you’re able to work out a short sale agreement, and you find a buyer that garners back approval, pre-foreclosure ends. The bank doesn’t have to foreclose, and you walk away with no bills (but also no house).
How pre-foreclosure affects your credit
Foreclosure hits your credit hard, but how much will pre-foreclosure affect your credit?
“Credit scores are based on payments, whether current or late,” Richardson points out. If you’ve reached pre-foreclosure, the bank has recorded your lateness, and that is reported to the credit-reporting agencies. Future creditors will be able to see that you fell behind on payments, and it will make it harder to get future loans.
There is one bit of good news, though. If you can pull a home out of pre-foreclosure, your credit won’t take as much of a hit as it would if the bank foreclosed.
“If it goes to foreclosure, it will be worse because you will still owe money,” Richardson says.Jeanne Sager has strung words together for the New York Times, Vice, and more. She writes and photographs people from her home in upstate New York. Follow @JeanneSager