By Jim Akin
Edited by Michelle TipswordWhat Is Pre-Foreclosure?
Quick Answer
Pre-foreclosure is the span of time between a borrower defaulting on their mortgage and the approval of a foreclosure order, during which time the borrower can still negotiate an alternative to foreclosure.
If you default on your mortgage, you won't lose your house right away. You'll enter into pre-foreclosure, which is the time between the official default and any foreclosure order being approved by the court.
Pre-foreclosure is your last chance to become current on your mortgage before you lose your home and see the credit impacts of a foreclosure. Here's what you need to know about pre-foreclosure and what steps you can take during this time.
What Is Pre-Foreclosure?
Pre-foreclosure begins when you default on your mortgage and ends with one of the following events occurs:
- A legal foreclosure order is issued
- You sell the property
- You catch up with past-due payments or negotiate an arrangement with the mortgage company
Pre-foreclosure is typically a borrower's last chance to prevent property loss and serious credit damage after defaulting on their mortgage. A default means you've gone at least 90 days without making your mortgage payment.
During pre-foreclosure, you may be able to prevent a foreclosure by catching up on missed payments or negotiating an agreement with your lender, such as a loan modification, that enables you to remain in the home.
Learn more: What Happens During Foreclosure?
How Does Pre-Foreclosure Work?
While the timeline and specific legal requirements vary by locale, steps in the pre-foreclosure process are fairly consistent everywhere, as is the order in which they occur. They include:
- Mortgage default: A borrower is typically considered in default if they fail to make three consecutive monthly payments on their home loan. That is, 90 days after you miss your first mortgage payment, your lender typically considers you in default and initiates the pre-foreclosure process.
- Notice of default: Formal pre-foreclosure typically begins when the lender sends a certified letter declaring their intent to begin foreclosure proceedings within 30 days. Mortgage proceedings cannot officially begin until you are 120 days behind on your payments—that is, 30 days after you go 90 days past-due on the loan.
- Public notice: In many states, when a lender issues a pre-foreclosure notice, the borrower's name is also posted to a public listing of individuals who are subject to foreclosure. When the mortgage company petitions the court or relevant public agency to initiate foreclosure, that becomes part of the public record as well, and can be found by searching appropriate public files or databases.
- Foreclosure order: A foreclosure order ends the pre-foreclosure period. Legal requirements for issuing the order vary widely. Some states require the lender to submit evidence of nonpayment for review by a judge—a process can take many months. In other states, foreclosure authorizations can be issued within a few weeks.
- Final foreclosure and eviction: Once the court approves the foreclosure order, an eviction notice is issued for any occupants of the home. You will be given a date by which you and your possessions must be out of the home.
- Property listed at auction: After the occupants are evicted, the locks are changed and the property is listed for sale at a public auction. If it fails to sell at auction, ownership reverts to the lender—making it real estate owned (REO) property—and the lender may arrange to sell it through a private sale.
Learn more: What to Know About the Different Types of Foreclosure
How Long Is the Pre-Foreclosure Process?
In most U.S. jurisdictions, the process of foreclosure—including eviction of the occupants, seizure of the premises and scheduling an auction of the property—cannot begin until a borrower is 120 days behind on their mortgage payments.
Pre-foreclosure typically begins after a third missed payment (when the loan is 90 days past due), with a notice from the lender of intent to start foreclosure in 30 days (at the 120 days past-due mark) unless payment is made.
The timeline between notice of intention to foreclose and the issue of a foreclosure order depends on state and local law and can range from several weeks to a year or longer.
| Stage | What It Means | What the Borrower Can Do | What a Buyer Might See |
|---|---|---|---|
| Delinquency (30 to 89 days without payment) | Homeowner misses one or two mortgage payments | Reach out to mortgage company to investigate options; consult a certified housing counselor | Typically, there is no public information available to potential buyers at this time |
| Loss mitigation review (beginning after 30-day delinquency) | Soon after first missed payments, the mortgage company typically reaches out to the borrower in an effort to bring loan current | Work with mortgage company on alternatives to foreclosure; consider selling the property | This process is not visible to potential buyers |
| Default (90 days without payment) | Homeowner misses a third consecutive mortgage payment | Work with mortgage company on alternatives to foreclosure; consider selling the property | While not necessarily visible to potential buyers, default can trigger events that cause the property and borrower to be listed in publicly available records |
| First notice/filing (90 to 120 days without payment) | Mortgage company files documents to initiate foreclosure proceedings. Notice is sent to the homeowner. | Work with mortgage company on alternatives to foreclosure; consider selling the property | In some jurisdictions, notice of default leads to public notice that the borrower is in default and facing foreclosure; foreclosure petitions are public documents available in court records or other public files |
| Pre-foreclosure listing activity (after 120 days without payment) | Properties in default are often listed in municipal public records and may be reflected in online property-listing services, although they aren't actually for sale | Work with mortgage company on alternatives to foreclosure; consider selling the property | Property may be listed in public records accessible publications or databases |
| Foreclosure sale scheduled | Property will be offered for sale at public auction | Borrower's options are exhausted and the property must be vacated | At this point, pre-foreclosure sale is no longer possible, and potential buyers must bid at auction |
What Should You Do if Your Home Goes Into Pre-Foreclosure?
Here are some options to think about if you find yourself in pre-foreclosure (or think pre-foreclosure is imminent):
Seek Professional Advice
If you're in pre-foreclosure (or, ideally, before defaulting on your mortgage), consider seeking guidance from a professional. The U.S. Department of Housing and Urban Development (HUD) maintains a list of certified housing counselors who can suggest options and advise you on your rights and obligations.
Consider Selling the House
If you can no longer afford to pay your mortgage, selling your home may be your best option. In an ideal scenario, you'll be able to use proceeds to pay off your mortgage, including any missed payments you may have accumulated.
If you have substantial home equity, you could even clear some additional funds that you can put toward a more affordable housing option.If you're underwater on the loan—that is, you owe more on your mortgage than the home's market value—the transaction would be considered a short sale. This would require your lender's permission, and in some states, you'd potentially be subject to a deficiency judgment obligating you to repay some or all of the difference between the sale price and the outstanding balance on your loan.
Learn more: What Happens if You Don't Pay a Deficiency Balance?
Make Up Missed Payments
If you can sell assets, find a source of supplemental income or get a private loan from a loved one, you may prevent foreclosure. Work to make up any missed payments as soon as possible and, of course, keep up with future payments.
Seek Loan Forbearance
If you've missed mortgage payments due to a temporary income loss or reduction and you're confident you'll be able to resume payments (and make up the missed ones) within a year or less, asking your lender for mortgage forbearance could prevent foreclosure and buy you time to get back on track with your payments.
Look Into Mortgage Modification
If you've experienced a permanent loss in earnings but still have steady income, your mortgage lender may agree to a mortgage modification, which reduces your monthly payment down to an amount you can afford. This typically adds payments to the loan term and increases the total cost of the loan.
Lenders are not obligated to offer loan modifications, but it can't hurt to ask for one.
Consider Chapter 13 Bankruptcy
Another option if you have a steady income but a lower paycheck is Chapter 13 bankruptcy, which can allow you to stay in your home while you work through a court-ordered plan to repay a portion of your outstanding debts.
Note that repayment plans are subject to court approval and, depending on your income and the nature of your other debts, the court may or may not allow you to keep your house under a Chapter 13 plan.
Chapter 13 bankruptcy, however, can do more harm to your credit than a foreclosure. It is considered a severe negative event in your credit history, and remains on credit reports for seven years, dragging down your scores the entire time.
Learn more: Is Filing for Bankruptcy Bad?
Consider a Deed in Lieu of Foreclosure
In a deed in lieu of foreclosure arrangement, you forfeit the house and turn it over to the lender voluntarily, without the legal foreclosure process. Because this can save the lender (and you) legal costs, the lender may be willing to offer some concessions as part of the process, such as forgiving any mortgage payments you may have missed.
Sometimes a lender even provides a "cash for keys" stipend you can put toward an apartment deposit or other housing arrangements.
A deed in lieu of foreclosure prevents a foreclosure from appearing on your credit reports, but it will appear as a negative entry on your credit reports, with negative consequences for your credit scores. The damage is typically less severe and of shorter duration than those of a foreclosure.
Learn more: How to Stop Foreclosure
How Does Pre-Foreclosure Affect Your Credit?
Credit reports do not reflect pre-foreclosure status, so pre-foreclosure has no direct impact on credit scores. The missed payments that lead up to pre-foreclosure, however, will be noted on your credit reports.
Because payment history is the single biggest factor affecting credit scores, can have a significant negative impact on your credit. Just one missed loan payment can have a significant negative score impact, and the consecutive missed payments that precede pre-foreclosure can cause further damage.
If pre-foreclosure culminates in foreclosure, your credit reports will reflect that for seven years, dating from the first missed payment that led to foreclosure. A foreclosure entry on your credit reports can have a more severe and long-lasting negative effect on your credit scores than accumulated missed payments.
Learn more: What Affects Your Credit Scores?
Can You Buy a House in Pre-Foreclosure?
If you're looking for a home or real estate investment, making the right offer on a property in pre-foreclosure could land you a good deal and offer a lifeline to a struggling homeowner. But purchasing a pre-foreclosure requires tact and know-how: Properties in pre-foreclosure are typically not on the market, so identifying them may require researching public records, and property condition may not be known. What's more, owners working to keep their homes may be resistant or even hostile to purchase overtures.
If you're interested in pursuing a pre-foreclosure sale, consider working with a real estate professional with experience identifying and negotiating pre-foreclosure transactions.
Should You Buy a House in Pre-Foreclosure?
If you aren't in a rush, are willing to do some research to uncover homes in pre-foreclosure and are willing to approach homeowners who may have no interest in selling to you, buying a property in pre-foreclosure can land you a good deal and benefit a homeowner under financial stress. Here are some benefits and drawbacks to consider:
Pros
-
Homeowners facing foreclosure may be enticed to sell if presented with the right offer.
-
There may be less competition for pre-foreclosure properties than for properties listed for sale or offered at foreclosure auction.
-
In contrast to foreclosed properties, which are typically sold as-is, you may be able to arrange a detailed examination of a pre-foreclosure property.
Cons
-
Homeowners hoping to keep their properties may resist purchase offers.
-
Properties in pre-foreclosure may or may not be in states of disrepair or neglect.
-
If the seller is willing to accept your offer but owes more on the property than what you'll pay, the transaction will be considered a short sale and will require the agreement of the seller's mortgage company. This can prolong or even derail the sales process.
How to Buy a House in Pre-Foreclosure
Buying a house that's in pre-foreclosure can be a challenge, entailing greater risk than a typical home purchase and requiring extra effort and a diplomatic approach. Here are steps you can take when pursuing this option.
- Get your offer together. Determine your budget and line up the necessary funding. If you plan to make a cash bid, free up the necessary funds and place them in an account you can readily access. If you plan to finance your purchase, get a preapproval letter from your lender that you can use to show the homeowner you're ready to move forward quickly with a purchase.
- Identify promising properties. Depending on your location, this could require reviewing public notices of intent to foreclose, scanning court records for foreclosure filings or using an online database. An experienced real estate pro can advise on the best approach or perform the search for you.
- Scope out options. A pre-foreclosure property may have fallen into disrepair and, since it isn't actually on the market, you may not have the opportunity to thoroughly vet the property before floating a sale offer. You or your representative should take an external look before making a move, and request a walk-through in conjunction with a purchase offer. You can make a formal inspection contingent on a cash offer, and if you're financing the purchase, an inspection will likely be mandatory.
- Approach owners with a purchase offer. This requires delicacy, as many owners in pre-foreclosure may intend to stay in the property. A real estate pro with pre-foreclosure experience can help you frame your offer and present it in a way that protects everyone's dignity.
- Finalize the deal. Once you've found a willing seller and are satisfied with the condition of the property, complete the sale via a traditional closing process.
Frequently Asked Questions
The Bottom Line
If your home is in pre-foreclosure, you still have options, so don't abandon hope. Working with your mortgage company and a HUD-approved housing counselor may lead to alternatives to foreclosure.
Throughout the process, your credit report and scores are likely to take a hit, but you can begin the process of rebuilding your credit right away.
Instantly raise your FICO® Score for free
Use Experian Boost® to get credit for the bills you already pay like utilities, mobile phone, video streaming services and now rent.
No credit card required
About the author
Jim Akin
Jim Akin is freelance writer based in Connecticut. With experience as both a journalist and a marketing professional, his most recent focus has been in the area of consumer finance and credit scoring.
Read more from Jim