Missing a few monthly mortgage payments is a predicament that can befall almost any homeowner. Late payments often accompany unforeseen life events, such as divorce or the death of the household breadwinner. Broader home loan defaults also tend to materialize in unfavorable economic conditions.

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 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 process

The preforeclosure process 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.

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.

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

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. Remember that the lender’s ultimate goal is to collect the debt, not take the keys to your home. Because of this, most are generally willing to work with you if you’re struggling to pay your mortgage but want to stay in your home.

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 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,” explains 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.

Keep in mind that because borrowers in preforeclosure have already skipped payments, your options may still 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.

It is possible, though, that 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.

Still, preforeclosure homes are tricky purchases. Generally, buyers send offers to the lender or servicer, not the homeowner, and commit to purchasing the property “as-is,” meaning that the lender and seller will not make any repairs to it.

Because the lender or servicer manages the transaction following institutional criteria, the sale also tends to take much longer than a normal real estate transaction, Chando says.

A sale agreement does not necessarily halt the preforeclosure process, either. 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,” Chando says.

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. 

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