Key takeaways

  • Preforeclosure begins when a homeowner has missed several monthly mortgage payments (usually, three).
  • Preforeclosure indicates that the lender is legally pursuing foreclosure.
  • Acting quickly during preforeclosure can help homeowners stay in their homes or avoid foreclosure.

Missing a few monthly mortgage payments is a predicament that can befall almost any homeowner. When you stop making payments on your mortgage, your loan servicer may initiate the preforeclosure process, which could ultimately lead to foreclosure. However, with appropriate and prompt action, homeowners facing preforeclosure can avoid losing their home.

What is preforeclosure?

Preforeclosure is the first step in the foreclosure process, and it usually begins when a homeowner is 90 days past-due on their mortgage. At this point, the loan servicer may issue the homeowner a notice of default indicating that they are pursuing legal measures — initiating a foreclosure — to collect the unpaid debt. Preforeclosure means the homeowner needs to act fast to avoid losing their home.

How does the preforeclosure process work?

The preforeclosure process usually kicks in after three missed payments. The homeowner will receive a letter or legal notice from their lender or servicer that their home has been placed into preforeclosure proceedings.

During the preforeclosure period, the homeowner and the lender usually explore any possibilities for the borrower to cover the missed mortgage payments. If the two parties can’t reach an agreement on how to remit the debt by the time the court approves the lender’s request to initiate foreclosure proceedings, foreclosure is the likely outcome.

How long is the preforeclosure process?

State laws govern the foreclosure process. So, depending on the state and the lender, preforeclosure can last several months to a couple of years. In some jurisdictions, the lender has to file a lawsuit to repossess the home, meaning that a judge must hear the case, which often translates into a longer and slower process.

What to do if your home is in preforeclosure

If you run into financial trouble and miss your mortgage payments, contact your lender or loan servicer as soon as possible. Ideally, you want to talk with them before you reach preforeclosure.

Remember that the lender’s ultimate goal is to collect the debt, not take the keys to your home. In fact, foreclosing costs lenders a sizable sum in legal fees. Because of this, most are generally willing to work with you if you’re struggling to pay your mortgage.

Here are a few options you can explore to avoid foreclosure.

Loan modification during preforeclosure

When in preforeclosure, your lender might offer a repayment plan, or a loan modification that adds the outstanding missed payments and any late fees to the end of the mortgage term, or spreads them equally over the remaining years of the loan.

If you can provide a good reason for your financial hardship, your lender might also offer forbearance — a pause on your mortgage payments. Just be advised that you’ll need to make up those payments at some point.

Short sales of preforeclosure homes

If you have negative equity and are underwater on your mortgage, another option is a short sale, although the lender will have to agree to it and you may not have much say in the process. In a short sale, the lender accepts less than what is owed on the home, and generally forgives the remaining debt.

“It’s very stressful, because people lose control,” says Joanne Chando, a Florida-based real estate broker and instructor. “The servicer and the investor — that’s the person who owns the loan — are in control. And that is their right; it’s their money. They want to get as much as possible and they want to get this done and off the books.”

Even though the result is similar to a foreclosure in that the homeowner loses their home, a short sale is not as damaging to credit, so it may be a better route — especially since it can be challenging to get a mortgage after foreclosure.

Deed in lieu of foreclosure

With a deed in lieu of foreclosure, you essentially hand your deed — and ownership rights to your house — over to the lender. You’ll need to move out, but this usually releases you from your debt.

Be advised, though, that if your home is worth less than you owe, your lender might require you to make up the difference. Your lender is also not required to accept a deed in lieu of foreclosure agreement.

Other options

Keep in mind that because borrowers in preforeclosure have already skipped payments, your options may be somewhat limited. It is highly unlikely, for instance, that you would be able to refinance your mortgage, which typically requires you to be current on your payments.

However, you could consider offers to buy the home, say from an investor, during the preforeclosure period. If you were to find a buyer and have positive equity in your home, you may be able to sell it and pay the loan back with the proceeds to avoid foreclosure.

How to buy a house in preforeclosure

Preforeclosure homes are typically priced below market value, making them affordable listings especially for investors and bargain-hunters. Moreover, because the homeowner is likely still living in the home, a preforeclosure can sometimes be in much better condition than their foreclosed counterparts.

These purchases can be tricky, though. Due to the framework and timespan of preforeclosure home sales, Chando says that first-time homebuyers and those looking to move into a new residence quickly should avoid them. Second-home purchasers and real estate investors are better-suited candidates. 

Benefits and drawbacks of preforeclosure sales

Benefits

  • Lower price. These homes can be more affordable since they are typically priced below market value.
  • Better condition. Compared to foreclosed homes, preforeclosure homes can often be in better condition since the homeowner is still residing in the house.

Drawbacks

  • Take the home as-is. People buying properties in preforeclosure usually commit to purchasing the property “as-is,” meaning that the lender and seller will not make any repairs to it.
  • Length and complexity of transaction. Generally, buyers send offers to the lender or servicer, not the homeowner. Because the lender or servicer manages the transaction following institutional criteria, the sale tends to take much longer than a normal real estate transaction, says Chando.
  • Possibility of the sale falling through. A sale agreement does not necessarily halt the preforeclosure process. In some states, the home can still inch toward a judicial foreclosure hearing even when there’s an interested buyer. “Understand that [the preforeclosure sale] could also fall apart right before closing if the judge could [decide on the] foreclosure,” says Chando.

FAQs on preforeclosure

  • Preforeclosure means that your lender has started taking legal action toward foreclosure because you have missed mortgage payments. But during preforeclosure, you still have time to explore other options, from loan modification to a short sale, to avoid foreclosure.

    Foreclosure, on the other hand, means the lender has the legal right to seize your home to make up what you owe on your mortgage.
  • You’ll get a notice — usually, a letter — from your lender telling you that they’ve started preforeclosure because you’ve missed enough payments. At this point, you should reach out to your lender as soon as possible to explore solutions for making up the missed payments and staying in your home.