Pre-Foreclosure

Pre-Foreclosure Meaning

Pre-foreclosure is the initial legal process of repossessing a property by a lender. When a mortgager breaches the mortgage contract, it triggers the lender to initiate the foreclosure process. Pre-foreclosure starts with giving notice of default to the mortgager about the lender's intention to foreclose the property.

A common mortgage breach can occur when the borrower fails to make the monthly payments for a set of months. Pre-foreclosure is the first step taken by a lender here and it gives the borrower a chance to take action to retain their collateral. The lender also needs to inform the court in such a case.

• Pre-foreclosure is the early stage of property reclamation by a lender from a borrower who has defaulted on mortgage payments for three or more months.
• While in pre-foreclosure, the homeowner can decide to sell the house to raise funds to pay the debt since the property is still legally in their name. They also have the option of negotiating with the lender. This way, they can have their terms modified, get a moratorium or other benefit to avoid losing the house or going into foreclosure.
• Pre-foreclosure listings are great for buyers. They allow them to access real estate at prices almost always lower than the property's value.

How Does Pre-ForeclosureWork?

Pre-foreclosure is the first step of a foreclosure procedure. A mortgager is subject to a set of agreements when they get a mortgage. These include a pledge to make mortgage payments promptly by an agreed date of the month. The lender can also include other terms, such as a grace period before the mortgager can start making payments. 

If the mortgager cannot make a payment for any reason, the lender may require them to inform them of their circumstances immediately. This can lead to a moratorium of an agreed duration in some cases. It allows the mortgager to get their finances in order. 

A pre-foreclosure is triggered when the mortgager breaches one of the contract terms. The most common is not paying the mortgage premium for a certain number of months, depending on the contract. The lender may first give notice to the lender about their non-payment. If this goes unheeded, the lender may decide to repossess and auction the property. At this point, the lender will be convinced that the borrower can no longer maintain their mortgage obligations. 

When the pre-foreclosure is triggered, the mortgager has few options in negotiations with the lender. However, some lenders may have stipulations in terms of what the mortgager can do to avoid proceeding to foreclosure and auction. These terms should be clear to the mortgager even before signing up for the mortgage. The mortgager would need to be delinquent for some time (typically for three consecutive months, but this varies by company) before the lender decides to pre-foreclose.

In such an instance, the lender could reverse the process. It typically involves negotiation for different terms or modifications of the mortgage, making the late payments (which may include extra interest), or selling the house for its full (or slightly less) value before foreclosure. 

What does Pre-foreclosure Listing Means?

Pre-foreclosure listing is one way to mitigate its negative effects to the mortgager. It is a process where the mortgager in pre-foreclosure puts the house up for sale. When listing the property, the mortgager must notify the lender, who has to agree to this process. The point of a mortgager doing a pre-foreclosure listing is to sell the house and pay the mortgage. It avoids a long-drawn foreclosure process which is draining. A foreclosure also has a huge negative impact on one's credit score. The pre-foreclosure listing is one way the mortgager can smartly avoid any of these problems. 

When listing a house in this manner, it is usually necessary to state that the property is pre-foreclosure. It is a legal requirement in some jurisdictions. A a mortgager, may not expect to get the full price of the home's value. The goal of such listing is to get enough money to offset the rest of the mortgage. However, it is rare to sell the house at a price equal to or more than the outstanding loan. One is more likely to sell it at a lower price. This is known as a short sale. 

When a mortgager opts for a pre-foreclosure listing, it would be wise to involve realtors. This gives them an optimal chance of getting as much out of the house as possible. It also avoids any legal technicalities that may hinder the listing process or make the lender continue with the pre-foreclosure. A quality realtor can get the best price for a home (even in a short sale) within the shortest time possible and with the least risk and hassle.

How to Buy a House that is in Pre-foreclosure?

Buying a home in pre-foreclosure is a good idea. For someone looking for one, the multiple-listing service site is a great place to start. Buying a house this way allows one to get a price that may be significantly lower than the home's value. For people looking for homes to live in, this represents great savings. Many people also buy homes in pre-foreclosure and sell them later at their full value, making a good profit. Some important issues to take note of when buying a home that is in pre-foreclosure include: 

• Work in consultation with a realtor: The fact that a home is in pre-foreclosure means that some legal strings are attached to it. If not careful, one may buy such a home and then end up having to deal with legal technicalities later. Always have a realtor investigate the legalities of buying a home in pre-foreclosure before going ahead. 
• Having the house valued is also important: Valuation involves examining the house's interior and exterior and then deciding how much its value is. The valuation report can also give one data on how much it will take to renovate the home. Some homes may be damaged and not worth buying and fixing up, even if it is in a pre-foreclosure listing. 
• Negotiate with the seller: A person will be dealing with the homeowner when buying a home through a such listing. The house in pre-foreclosure means that most will be willing to negotiate, so do not be afraid to try it. Even if someone is buying a home for the first time, negotiations can yield surprising savings.

Pre-Foreclosure vs Foreclosure

A pre-foreclosure means that the mortgager has defaulted on several mortgage payments, and the lender has thus decided to start repossessing and auctioning the home. The property is still in the borrower's hands, who can decide to sell the home to pay the lender. In a foreclosure, the lender has already claimed the property and is listing it or auctioning it. Typically, the price at which the home will be sold will be less than the value of the outstanding mortgage. 

Frequently Ask Questions (FAQs)

Recommended Articles

This has been a guide to Pre-foreclosure meaning. We discuss how to buy a pre-foreclosure house, its listings and differences with foreclosure, etc. You may learn more about financing from the following articles –

• Short Sale vs Foreclosure
• Cancellation of Debt
• Mortgagor