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Most people understand what foreclosure is, but what is a pre-foreclosure home? As the name implies, it comes before a lender officially starts foreclosure proceedings.

When a homeowner defaults on their mortgage by failing to make payments, the bank or lender has the right to foreclose. The foreclosure process involves repossessing the home and evicting those living there. Before that happens, however, the homeowner is given a final warning and the house is considered to be in pre-foreclosure. 

A homeowner in pre-foreclosure still has a chance to keep their home, but they can also choose to sell. Those considering buying a pre-foreclosure home should understand the process and how it affects the home-buying experience.

The terms of a mortgage contract define when payments are due, and how many missed payments it takes to be in default. This is typically three payments, but it can vary. 

The lender will then send a “notice of default” letter to the homeowner, informing them that the home is in pre-foreclosure. Pre-foreclosure lasts 120 days, beginning when the first mortgage payment is missed. 

At the end of the 120 days, the home moves from pre-foreclosure to foreclosure. The bank sends a “notice of sale,” listing the date when they intend to hold an auction to sell the home. After the sale, the occupants typically have three days to move out. If a buyer is not found at auction (cash is usually required to buy at auction), the home becomes REO (real estate owned) property. This means the lender owns the home and will try to sell it on the open market—and the occupants must leave.

Pre-foreclosure does not always result in foreclosure. There are some things a homeowner can do within the 120 day time period to get out of pre-foreclosure and avoid foreclosure proceedings. 

• Come up with the money. If a homeowner is able to catch up and pay the late mortgage payments, they can get out of pre-foreclosure. The mortgage contract goes on as before, provided they keep up with future payments.
• Negotiate for a loan modification. In some cases, a lender may be willing to negotiate the terms of the mortgage, perhaps by adjusting the interest rate so monthly payments are lower. Or, they may agree to tack the missed payments onto the end of the loan. A bank might be more willing to do this if the homeowner has a record of paying on time and is having financial trouble due to some temporary circumstance, such as unemployment or illness.
• Deed in lieu of foreclosure. It is rare, but some lenders may allow a homeowner to hand over their deed and walk away from their mortgage. This typically only happens in a hot housing market, where the bank is confident they can sell the home for more than they would get from payment of the original mortgage.
• Sell the home in a short sale. A short sale is when a home’s sale price is less than the outstanding loan balance. Because they will be losing money, the bank must approve a short sale before it is finalized. The proceeds of the sale go directly to the bank, and they do not have to take on the responsibility of selling the home. Meanwhile, the homeowner avoids foreclosure and future mortgage payments (but must now find somewhere else to live).

For homeowners who desperately want to stay in their homes, it is best to find a way to pay or try to negotiate with the bank. If neither of those is possible, the next best thing is to sell the house or hand over the deed when the house is still in pre-foreclosure. While the missed payments will count against a homeowner’s credit score, a foreclosure is worse. Going through a foreclosure will make it much more difficult to get financing in the future, as lenders will see it as too risky. 

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What does a pre-foreclosure home mean for someone wanting to buy a house? It can mean an opportunity to get a good deal—in many cases, paying below the market price. But a pre-foreclosure purchase is not without complications.

One very important thing to remember about buying a pre-foreclosure is that these homes are usually sold as-is. And if the owner has been unable to afford the mortgage payments, they may have fallen behind in maintenance and upkeep, too. So while the house might be available for a low price, buyers are wise to be sure their budget can handle any necessary repairs. 

As with any purchase, serious buyers should get pre-approved for a mortgage. They should also be sure that the house is what they want and need for their family. A low price should not be the only criterion for choosing where to live.

Just because a house is in pre-foreclosure does not mean it is for sale. The homeowner might still be trying to negotiate with their bank or gather the funds to catch up with their mortgage payments. 

A determined buyer can find homes that are in pre-foreclosure, though. Notices of default are public record, so these houses can show up online on sites like Zillow or in the legal notice section of local newspapers. It is best to work with an agent rather than trying to contact an owner directly. 

Real estate agents with experience in how to buy a foreclosed property can also help with those in pre-foreclosure. They will be able to find these properties and may have inside information about those who are considering a short sale. Berkshire Hathaway HomeServices Select Properties has the advantage of partnering with USA Mortgage, which can help both the buyer and the seller. 

The sale of a pre-foreclosure home can be a win for everyone involved.

The seller can get out from under a mortgage that they can not afford. And by avoiding foreclosure proceedings by selling the house in pre-foreclosure, their credit rating will take less of a hit. They will, however, need to find a new, more affordable place to live.

Buyers can often buy the home they want for an amount well below the market price. If their real estate agent can approach the owners early in the process, they might have little competition for the sale. However, pre-foreclosure homes might need quite a bit of work and the bank must approve the sale.

Finally, the lender is typically quite happy when a homeowner can sell their home in pre-foreclosure. Not only does the bank save the cost of foreclosure proceedings, but they do not have to take the house into their inventory. This means avoiding the need for an auction or putting the house on the market. 

If you are facing pre-foreclosure and need to sell your home, or if you are interested in a house that is in pre-foreclosure, contact Berkshire Hathaway HomeServices Select Properties. Our agents will be happy to guide you through these complex sales transactions.