What Does Pre-Foreclosure Mean for Homeowners and Potential Buyers?
Purchasing a home that is being foreclosed upon can be a great way for potential homeowners to find homes at a cost that is below market value. But purchasing a home that is in any stage of foreclosure can present unique challenges that differ greatly from purchasing a home on a more open market.
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What Is Pre-Foreclosure?
When a homebuyer takes out a loan with a lending institution in order to make a purchase, they sign a financial agreement with a lending institution. When they sign that agreement, the borrowers consent to pay the loan in monthly installments, which cover a portion of the principal balance, as well as a portion of their interest on the mortgage. If the borrower is unable or refuses to make these payments for 4-6 months, thereby violating the terms and conditions of their contract, the pre-foreclosure process begins.
A “pre-foreclosure” refers to the state of a property that is in the early stages of repossession by a financial backer or institution after the borrower of the loan has neglected to keep current in their mortgage payments. Pre-foreclosure is a multi-step process that begins when the lender or financial backer files a default notice on the property through the court system.
By filing with the court, lenders inform property owners and crediting agencies, that the lender will be pursuing legal steps moving forward if the overdue payments are not taken care of within a certain window of time. From here, the borrower can choose to make arrangements with the lender, pay off the outstanding debt in full, sell the property, or continue on with the foreclosure process.
How to Avoid Pre-foreclosure
The best way to avoid pre-foreclosure is to make your house payments on time, every time. If you happen to come into financial hardship that leaves you unable to afford your payments, however, there are options available to you to help prevent your property from going through the foreclosure process.
If you’re at all concerned that you will be unable to make your payments, it’s best to call your lender to see if there are any options available for your particular circumstances. In most cases, lenders are willing to work with borrowers, as the foreclosure process is time consuming and costly for both parties. If you have a feeling that you’re unlikely to meet the terms of your mortgage contract, don’t ignore the phone calls and letters from your lender, as it is bound to make your situation worse, not better.
“The bank doesn’t want the property back,” Beverly Hourlier, a real estate agent from San Diego says. “They want you to be able to save it, but you have to take action. Don’t bury your head in the sand and stop opening the mail. Contact your bank right away, and they may be able to find a way to work with you,”
Depending on your particular situation, especially if you experience sudden unemployment, your loan lender may modify the terms of your agreement. Below, we’ve listed a few options that you can take both with your lender and with the Federal Government to help you avoid pre foreclosure:
- Forbearance: Lenders may agree to give you a forbearance period, which allows temporary payment relief to assist homeowners who are dealing with financial hardship.
- Repayment plan: If you’ve missed a few payments, your lender may be willing to negotiate a repayment plan that allows you to make up for missed payments over the course of a period of time. If, for example, your mortgage is $1000 per month, a lender might agree to allow you to make up for missed payments by increasing your mortgage to $1100 per month until the delinquency has been repaid.
- Refinancing: Refinancing your mortgage allows you to pay off your existing mortgage, and take out a loan with new terms and conditions. In some cases that can help to lower your interest rate, making your monthly payments more easy to afford.
- Take advantage of the Making Home Affordable (MHA) program: The MHA program is a federal program that offers access to counselors that give advice and assistance during for people who may be struggling with housing. The hotline for the MHA program, open 24/7 is 1-888-995-4673. Help can also be found online at the U.S. Department of Housing and Urban Development’s website.
- Discover government programs aimed at helping families at risk of foreclosure: There are a number of other government programs that work to assist to help homeowners at risk of losing their homes. The majority of these programs are funded through the Treasury Department and HUD whose websites you can visit for more informations about these programs.
Pre-Foreclosure vs Short Sale: What’s the Difference?
Pre-foreclosure occurs when a homeowner is more than 90 days delinquent on their mortgage payments. Typically the bank or lending institution initiates the foreclosure process. At this point in the process, the home is still legally owned by the owner, and doesn’t necessarily mean that the homeowner is underwater or at risk of losing their home entirely.
Short sales, on the other hand, are one option that borrowers have to help them avoid foreclosure. They typically occur when the borrower owes more on the mortgage than the property is actually worth. In order for a short sale to occur, the lending institution must approve the sale of the home in an amount that is typically less than what the current borrowers owe on the loan.
If you’re looking to purchase a new home, you might be able to find ideal prices, but the process isn’t for the faint of heart. In fact, purchasing a pre-foreclosed upon house or a house that is in short sale can be incredibly complicated.
Buying a Home in Pre-Foreclosure
Those looking to purchase property are attracted to properties that are in the pre-foreclosure process for a number of reasons. Homes that going through the foreclosure process are often listed below market value, meaning that buyers can save thousands of dollars. However, it’s important to note that it’s also the most difficult stage to purchase a home.
This is due, in part, to the fact that finding a listing for a pre-foreclosed home doesn’t necessarily mean that the property is for sale, as the pre-foreclosure stage is a period in time in which a Notice of Default has been filed and issued to a homeowner. At this point in the foreclosure process, the original homeowner still has time to pay off their debts or find a buyer who is interested in purchasing the home through short sale.
Risks of Buying a Home in Pre-Foreclosure
Unless the new potential buyer pays the mortgage and closing costs in full, the lender has the right to approve or deny any sales moving forward. If you’re looking to purchase a home that is in going through the pre-foreclosure process there are some risks and headaches you should be aware of. Those can include:
- Overdue home repairs
- Sub-standard property conditions
- You may be responsible for debts connected to the home
- Lots of paperwork
- Slow response time
- Sellers still occupying the home
- Lender may not agree to the price
- Mortgage complications
- Stiff competition from other potential buyers
Buying a home at any stage in the foreclosure process lacks simplicity, as you’re not only dealing with a seller, but you’re also dealing with the lending institution. Tensions can run high, complications are sometimes abundant, and you might not be aware of the condition of the home before you purchase.
“When a property is being listed as a short sale or foreclosure, you’re no longer just dealing with the seller,” Colin McDonald, a real-estate agent with Berkshire Hathaway HomeServices Blake in New York says. “A bank is now involved, and unfortunately, they only care about getting what is owed to them. They will drag the process on for as long as they like.”
Benefits of Buying a Home in Pre-Foreclosure
There are many benefits, however, to purchasing a home that is in pre-foreclosure or in some stage of the foreclosure process. Whether you’re looking to flip properties, or simply looking for a new home for yourself, benefits of purchasing a house in pre-foreclosure can include:
- Possibility of a home being sold through short sale
- Banks and sellers are more motivated to sell the property, giving you negotiation power
- Buyer is able to better research the title throughout the pre-foreclosure period
- You can avoid auctions
Purchasing pre-foreclosed homes is not for the faint of heart. However, armed with the right information, future homeowners can make decisions about purchasing homes in pre-foreclosure.
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This post was updated July 19, 2018. It was originally published June 4, 2018.