What Is Preforeclosure and How Does It Work?
Understand preforeclosure, the critical phase before foreclosure. Learn what it is and how this complex process works for homeowners.
Preforeclosure describes the period after a homeowner defaults on their mortgage payments but before the lender completes the full legal process of foreclosure. This phase provides a temporary window for the homeowner to address missed payments and potentially avoid losing their property. During this time, the lender initiates formal steps to recover the debt.
How Preforeclosure Begins
Preforeclosure begins when a homeowner misses several scheduled mortgage payments. Lenders offer a grace period, often between 10 to 15 days, after the due date before applying late fees, which can range from 4% to 5% of the overdue payment. Continued non-payment beyond this period leads to the mortgage account being classified as delinquent.
After a series of missed payments, typically three to six months, the lender issues a formal declaration of default. In states with non-judicial foreclosure, this often takes the form of a Notice of Default (NOD) recorded in public records. For states requiring judicial foreclosure, the lender initiates legal action by filing a lawsuit in court. This formal notification indicates the borrower has failed to meet loan obligations and the lender intends to pursue foreclosure if the default is not remedied.
The period following the Notice of Default or initial legal filing is the preforeclosure phase. This timeframe, often ranging from 90 to 120 days, allows the homeowner to resolve the default before the lender proceeds with a foreclosure sale. During this window, the property is in preforeclosure, indicating a serious mortgage delinquency.
Homeowner Actions During Preforeclosure
Homeowners facing preforeclosure have several options to resolve their mortgage default and potentially retain their property. One approach is reinstatement, which involves paying the full amount of all missed payments, including principal, interest, escrow, and any accumulated late fees or penalties. This brings the loan current, stopping the preforeclosure process and allowing the homeowner to resume regular mortgage payments.
Another option is a loan modification, where the homeowner negotiates with the lender to alter the original mortgage terms. This could involve reducing the interest rate, extending the loan term to lower monthly payments, or a temporary forbearance on principal payments. Lenders may consider such modifications to help struggling borrowers avoid foreclosure, often requiring documentation of financial hardship.
A short sale provides an alternative if the homeowner cannot afford to keep the property but owes more than its current market value. In a short sale, the lender agrees to allow the property to be sold for less than the outstanding mortgage balance, accepting a loss on the loan. While this can impact credit, it is less severe than a full foreclosure and requires the lender’s explicit approval and release of the lien.
Finally, a deed in lieu of foreclosure involves the homeowner voluntarily transferring ownership of the property back to the lender. This option can be pursued when other resolutions are not feasible and allows the homeowner to avoid the lengthy and public foreclosure process. It results in a less damaging impact on the homeowner’s credit score compared to a completed foreclosure and provides a more orderly transition of property ownership.
What Happens After Preforeclosure
If a homeowner is unable to resolve the mortgage default during the preforeclosure period, the lender proceeds with further legal steps to regain possession of the property. The expiration of the preforeclosure window, without a resolution, signals the transition to the full foreclosure process. This next stage involves the lender taking action to sell the property and recover the outstanding debt.
The specific actions taken by the lender after preforeclosure depend on the type of foreclosure process applicable in the jurisdiction. In non-judicial foreclosure states, the lender schedules a public auction or trustee sale where the property is sold to the highest bidder. For judicial foreclosure states, the lender continues court proceedings, which can culminate in a judgment allowing for a foreclosure sale ordered by the court. This marks the end of the homeowner’s opportunity to cure the default before losing the property.