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When you fall behind on mortgage payments, your lender may eventually take your home to recoup the loss. But that won’t happen right away. Lenders must follow a series of steps that start with pre-foreclosure.
During this early phase in the foreclosure process, you may get the opportunity to rehabilitate your mortgage and keep your home. Here’s what you should know about pre-foreclosure to prepare.
What Is Pre-Foreclosure?
Pre-foreclosure is a legal process that a lender can take when a borrower misses several mortgage payments in a row. The lender will send the borrower a notice of default, which is a legal notice that kicks off the pre-foreclosure phase.
The borrower has a few options at this point:
- Catch up on payments
- Sell the home
- Make arrangements for a loan modification
If none of these happen during pre-foreclosure, the lender may start foreclosure proceedings.
How Does the Pre-Foreclosure Process Work?
When you take out a home loan, you sign a mortgage agreement that says the bank can reclaim your property if you stop making payments. If one of your payments is late by just a few days, there’s typically no need to worry as lenders often offer a grace period of 15 days after the due date. If you make a payment within this two-week period, you usually won’t owe fees or take a hit to your credit.
However, here’s what could happen after that grace period:
- Your lender reports your missed mortgage payment. After 30 days, your loan servicer may report the missed payment to the credit bureaus and charge a late fee. They’re required to contact you after 36 days go by without payments, although they may reach out sooner.
- The loan servicer assigns someone to your case. Once your payments are 45 days past due, someone will be assigned to your case. This representative will help you understand your options and answer any questions you have. When you hit the 60-day mark, you may incur a second late fee and the late payment will be reported to the credit bureaus.
- You receive a notice of default. You’ll receive this letter after missing three payments in a row. The loan servicer will give you 30 days to bring the loan current before they begin foreclosure proceedings. Additionally, the loan servicer can report the newest missed payment to the credit bureaus and charge another late fee.
The notice of default kicks off the pre-foreclosure phase. Depending on the state where you live, the loan servicer may add the notice to a public listing of borrowers who are subject to foreclosure. After you’ve missed payments for 120 days and haven’t made arrangements to pay back the money, your loan servicer may seek court approval to place a lien on your property. That starts the official foreclosure process.
Pre-Foreclosure vs. Foreclosure
The pre-foreclosure phase begins when a loan servicer sends a borrower a notice of default. This typically happens after the borrower skips three mortgage payments in a row without attempting to communicate with the loan servicer.
A borrower in pre-foreclosure still owns their home and has several options. They can sell the home—either in a short sale or regular sale—or work with the lender to catch up on payments. Lenders may be able to enroll the borrower in a special payment or relief plan during this time.
But if the borrower doesn’t sell the home or repay what’s owed, the lender can start foreclosure proceedings. They’ll usually have to get court approval to place a lien on the property. This may happen once the borrower misses four mortgage payments. The lender takes ownership of the property at this point and can sell the home.
| Pre-foreclosure | Foreclosure | |
|---|---|---|
| When does it start? | Occurs when the lender gives the borrower a notice of default (usually after 90 days of past due payments) | Occurs when the lender places a lien on the property in default (usually after 120 days of past due payments) |
| Who owns the property? | The borrower | The lender |
| Who can sell the home? | Borrower still can sell the home or take other actions to remedy the default | Lender can sell the home and may be able to ask borrower for any balance owed |
| What options does the borrower have? | Lender may be willing to negotiate late payments or agree to a loan modification | Borrower options and rights depend on state laws |
| When does it end? | When the borrower rehabilitates their home loan, sells the property or goes into foreclosure | When the lender sells the property, either at auction or through a private sale |
Can Pre-Foreclosure Be Stopped?
You can typically stop pre-foreclosure by catching up on all the mortgage payments you missed. It’s a good idea to contact your loan servicer as soon as possible and let them know you’re taking steps to make this happen. They’ll stop the pre-foreclosure process once your home loan is current.
Tip: You can use a housing counselor to help you understand your options.
Can I Buy a House That’s in Pre-Foreclosure?
Yes, you can buy a house that’s in pre-foreclosure. These houses may not be on the market because the owner may be trying to cure the default. But some pre-foreclosure homes are listed on websites like REDX, Foreclosure.com or local multiple listing services.
If you find someone who wants to sell their pre-foreclosure home, you can work with a real estate agent to submit an offer and negotiate the details. However, you may need to move fast. The owner may only have a few weeks before the lender puts the house up for auction. The home is considered foreclosed after the auction takes place, after which you’ll need to work with the lender to buy the home.
What To Do If Your Home Is in Pre-Foreclosure
If you’re falling behind on mortgage payments, you may be able to avoid foreclosure. The following options generally have less of an impact on your credit and your finances.
Refinance
Refinancing your mortgage involves taking out a new home loan, ideally with a lower interest rate. If you’ve paid off some of the original mortgage, then your new payments will be lower because the mortgage is based on a lower balance.
You might also refinance to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. This could prevent your monthly payments from increasing.
Ask for a Loan Modification
With a loan modification, you’ll permanently change the terms of your home loan. Your loan servicer might be willing to negotiate a loan modification if you have a documented financial hardship. They could, for instance, extend your loan term or reduce your interest rate to make your monthly payments more affordable.
Sell the Home
You can avoid foreclosure by selling your home—and potentially earn a profit. Home prices across the U.S. increased by 13.5% in August 2022 compared to August 2021, so you may be able to sell the home for more than you originally paid.
But if the value of your home has fallen for some reason, your lender may approve a short sale. That’s when someone buys your home for less than you owe on the mortgage.
Offer a Deed in Lieu of Foreclosure
If none of these options work for you, then you could consider offering a deed in lieu of foreclosure. With this type of arrangement, you’ll sign the deed to your home over to your loan servicer and move out. In exchange, the servicer releases you from your mortgage obligations.
Related: 7 Ways To Get Out Of Your Mortgage
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