What Is a Preforeclosure and How Does It Work?

Preforeclosure describes a stage where a homeowner has fallen behind on mortgage payments, but the property has not yet been seized by the lender. This period offers an opportunity for homeowners to address their financial situation and potentially avoid losing their home. It is a transitional phase after a borrower defaults but before a formal foreclosure sale. Homeowners retain ownership during this time and can explore options to resolve the delinquency. Preforeclosure status notifies homeowners the property is at risk if the loan is not brought current or an alternative solution is not reached.

Understanding Loan Delinquency

A property enters preforeclosure after loan delinquency, which begins when a homeowner misses a mortgage payment. Lenders offer a grace period, often 10 to 15 days, before assessing a late fee. If payment is not received within this grace period, a late fee, commonly 4% to 5% of the overdue payment, is added.

Lender communication usually involves reminder calls and letters, urging the homeowner to make the missed payment. These communications notify the borrower of delinquency and accumulating late fees. As additional payments are missed, lender communications become more frequent, outlining potential consequences. This period allows the homeowner a chance to correct the default before formal legal action.

The Formal Preforeclosure Process

The formal preforeclosure process begins when a lender files a public notice of intent to foreclose. This notice declares the borrower is in default and the lender plans to initiate foreclosure if the default is not remedied. The specific document varies by state, such as a Notice of Default (NOD) in non-judicial foreclosures or a Lis Pendens in judicial foreclosures.

A Notice of Default is recorded with the county recorder’s office, making it a public record. This document notifies the homeowner and public that the property is in preforeclosure and outlines the amount needed to cure the default. A Lis Pendens, Latin for “suit pending,” is filed in court records, indicating an ongoing lawsuit affecting the property’s title and serving as a public warning.

Once these notices are filed, a timeframe, often 90 to 120 days, begins for the homeowner to resolve the delinquency. This period allows the borrower time to reinstate the loan or explore other loss mitigation options before a foreclosure sale. The homeowner retains legal ownership throughout this preforeclosure period.

Options for Homeowners in Preforeclosure

Homeowners facing preforeclosure have several avenues to explore to prevent a full foreclosure and retain their property:

Reinstatement: This involves paying the entire overdue amount, including missed payments, late fees, and penalties, to bring the loan current. Successfully reinstating the loan stops the foreclosure process and allows the homeowner to resume regular mortgage payments.
Loan Modification: This involves altering the original mortgage terms with the lender. Modifications can include reducing the interest rate, extending the loan term to lower monthly payments, or a temporary reduction in the principal balance. The goal is to make payments more affordable and sustainable.
Short Sale: If homeowners cannot afford to keep the property but want to avoid a full foreclosure’s negative impact, a short sale is an option. The property is sold for less than the outstanding mortgage balance, and the lender agrees to accept the reduced proceeds. This requires lender approval to release the lien for less than what is owed.
Deed in Lieu of Foreclosure: This allows the homeowner to voluntarily transfer property ownership directly back to the lender. This agreement helps avoid the formal foreclosure process and its public record, often resulting in less credit score damage than a completed foreclosure. Lenders consider this when a short sale is not feasible and the homeowner wishes to surrender the property amicably.

Potential Outcomes After Preforeclosure

If preforeclosure is not resolved, the property proceeds to a foreclosure auction or sale. The property is offered to the highest bidder in a public sale, with proceeds satisfying the mortgage debt. The homeowner loses all rights once the sale is complete.

If the property does not sell at auction, it becomes Real Estate Owned (REO) by the lender. The lender takes possession and is responsible for its maintenance and eventual sale. If a homeowner successfully uses a preforeclosure option, the property does not advance to foreclosure, and ownership is retained.