Missing a few monthly mortgage payments can happen to nearly any homeowner. If you stop making payments, your loan servicer may begin the preforeclosure process, which could eventually lead to foreclosure. However, with timely and effective action, homeowners facing preforeclosure can often prevent losing their home.

What is preforeclosure?

Preforeclosure is the initial stage of the foreclosure process, typically starting when a homeowner is 90 days overdue on their mortgage payments.

After missing three consecutive payments, your loan servicer may issue a notice of default, signaling that legal action, including foreclosure, is being pursued to recover the unpaid debt. If you’re in preforeclosure, it’s crucial to act quickly to prevent losing your home.

How does the preforeclosure process work?

The preforeclosure process typically begins after three missed payments. The homeowner will receive a letter or legal notice from their lender or servicer indicating that their home has entered preforeclosure proceedings. This notice, known as a notice of default and filed with a public court, outlines that the lender will start foreclosure if the overdue payments are not resolved.

During the preforeclosure period, the homeowner and lender usually discuss options for the borrower to repay the missed mortgage payments. If an agreement cannot be reached and the court approves the lender’s request to proceed with foreclosure, the home may eventually be lost to foreclosure.

How long is the preforeclosure process?

State laws dictate the foreclosure process, so the duration of preforeclosure can vary significantly depending on the state and lender. It can last from several months to a couple of years. In some areas, the lender must file a lawsuit to repossess the home, which involves a judge hearing the case. This judicial requirement can result in a longer and more drawn-out process.

What to do if your home is in preforeclosure

If you experience financial difficulties and miss your mortgage payments, reach out to your lender or loan servicer immediately. It’s best to contact them before you reach the preforeclosure stage.

Keep in mind that the lender’s primary goal is to recover the debt, not to foreclose on your home. Foreclosure incurs significant legal costs for lenders, so they are often willing to work with you if you’re having trouble making payments.

Here are several options you can consider to help avoid foreclosure.

Loan modification during preforeclosure

During preforeclosure, your lender may propose a repayment plan or loan modification. This could involve adding the missed payments and any late fees to the end of your mortgage term or spreading them out over the remaining years of the loan.

If you can explain the reasons for your financial difficulties, your lender might also offer forbearance, which allows you to pause your mortgage payments temporarily. However, keep in mind that you will need to make up those payments later.

Selling a preforeclosure home

You might explore the option of selling your home. Keep in mind that a sale agreement doesn’t automatically stop the preforeclosure process. However, if you can secure a good price, you may use the proceeds to repay the outstanding mortgage balance, both principal and interest, thus avoiding foreclosure.

If you owe more on your mortgage than the home is worth, you might consider a short sale, though it requires lender approval. In a short sale, the lender agrees to accept less than the amount owed on the mortgage and typically forgives the remaining debt.

While a short sale results in the loss of your home, it generally has a less severe impact on your credit compared to foreclosure. This can be advantageous, especially since obtaining a mortgage can be challenging after a foreclosure.

Deed in lieu of foreclosure

With a deed in lieu of foreclosure, you transfer ownership of your home and the deed to the lender, effectively relinquishing your rights to the property. After this transfer, you will need to vacate the home, but this usually resolves your debt.

However, if your home’s value is less than the amount owed, the lender might require you to cover the difference. Additionally, the lender is not obligated to accept a deed in lieu of foreclosure and may choose other options.

How to buy a house in preforeclosure

Preforeclosure homes are often priced below market value, presenting an attractive opportunity for investors and bargain hunters. Additionally, since the homeowner is usually still residing in the property, preforeclosure homes can sometimes be in better condition compared to those that have already been foreclosed.

However, buying a preforeclosure can be complex. The process and timeline involved might not suit first-time homebuyers or those needing to relocate quickly. Second-home buyers and real estate investors might find these properties more suitable for their needs.

Pros and cons of preforeclosure sales

Pros:

  • Homes are often priced below market value, providing a potential bargain.
  • Properties are generally in relatively good condition.

Cons:

  • Foreclosed homes are sold “as is,” meaning you’ll be responsible for any necessary repairs.
  • The process of closing and finalizing a purchase can take longer.