Past due mortgage bills can lead to pre-foreclosure.

Home Buying

How Pre-Foreclosure Works for Homeowners and Potential Buyers

October 29, 2018 | by Andrew Schmeerbauch

Past due mortgage bills can lead to pre-foreclosure.

Many new investors and first-time homebuyers looking to score a deal look at pre-foreclosure homes. They've heard of other investors getting a great house for a low price, and want in on the deal. It doesn't help that there are sites boasting pre-foreclosures at 50% off(!).

Before diving into a list of pre-foreclosed homes, however, there are a few things you should know.

What is pre-foreclosure?

If you get three or four months behind on your mortgage payments, you'll probably receive a notice of default from your lender. Going into default means you have some choices: Come current on your loan, negotiate a loan modification, sell your property, or go through the foreclosure process.

The pre-foreclosure period is essentially the time between you not paying your mortgage and either rectifying the situation or foreclosing on the property. You will not be kicked out of your home during that period.

What are my options when I'm in pre-foreclosure?

Having your home in pre-foreclosure status isn't something to take lightly. It's a big deal, and you will need to figure out your next steps or end up without a home. You typically have a few options when you are dealing with a pre-foreclosure property.

1. Come current on your loan.

This one is really a no-brainer. If you come current on your loan and pay back all of the fees incurred, then you will be out of the pre-foreclosure process and can proceed to pay your monthly payments as usual.

There will be some damage to your credit (many late payments show up on your credit history), but it won't impact it as much as some of your other options would.

2. Get a loan modification.

To keep from you defaulting on your loan, the bank may work with you to modify your loan. A loan modification is where your lender agrees to either extend your loan so the monthly payments are less, agree to lower your interest rate or tack the extra payments from the months you were delinquent on your loans to the end of your loan.

If your lender just changes your interest rate, there will be no effect on your credit.

Lenders usually prefer this to foreclosure status because they don't have to go through the hassle of kicking out the homeowner and selling it at the auction.

3. Choose deed in lieu of foreclosure.

Deed in lieu of foreclosure means that you must hand over the deed of the property to the lender, the lender accepts, and it gets notarized.

You do not have to be in foreclosure status to turn in your deed in lieu of foreclosure, but your lender will need to accept the deed in lieu of foreclosure.

Many experts say the deed in lieu of foreclosure will cause as much damage to your credit as a foreclosure would (perhaps slightly less). If you are thinking of going this route, you should speak with your financial advisors before moving forward to make sure it is your best option.

4. Sell the property.

Many people are able to sell their home when they are in the pre-foreclosure process through a short sale. This allows their lender to approve the amount the house sells to make sure they are getting their money back. Working with a knowledgeable real estate agent is crucial during a short sale, as they will know what to set the price to appease the lender.

Selling via short sale will ding your credit, although not as severely as a foreclosure. The wait time between your short sale and buying a house is less than the wait time of foreclosing on a property and buying a new one.

5. Foreclose.

If you continue with the pre-foreclosure process and continue to do nothing, your lender will report it to the public record and the foreclosure process will begin. The foreclosure process typically takes between three and 10 months, during which you will be evicted from the property.

Buying a Pre-Foreclosure Home

You could get a great deal on a home that is in pre-foreclosure. Many investors are experts at contacting those that are in pre-foreclosure and negotiating a great deal by taking the home off of the homeowner's hands.

Although that makes the process very appealing, remember that not everyone in pre-foreclosure wants to sell their home. In fact, homeowners will often get current on their payments—thus removing them from pre-foreclosing status.

Here's how to buy a pre-foreclosed home.

1. Check out online listings and the area.

There are several sites that advertise pre-foreclosed homes. Make sure you check the list option to make sure the homes you are interested in are still in the pre-foreclosure process.

You may want to drive by the property you are looking into. Get to know the neighborhood a bit and maybe even talk to the homeowners about the property.

2. Make an offer.

To submit an offer, you could write a letter to the owner. This provides more sensitivity and is less confrontational. Remember that there is a reason they are in pre-foreclosure; be sensitive to that.

Keep in mind that if the property is managed by property management, you'll still need to submit an offer to the homeowner.

You could make an oral offer on the house, but you'll want to also get it in writing. That way, they can sign it if they want to proceed with the sale.

What's Next

If your offer is accepted, you will probably want to get a home inspection to make sure the property doesn't come with any surprises.

If you do complete the home buying process with a pre-foreclosed process, understand that you'll need to pay off any property liens.

Should I buy a pre-foreclosed house?

Many people like the idea of buying a pre-foreclosed home because they think there is more room for negotiation. If you want to get a good deal on a home, your better bet is to go with buying a home that has officially been foreclosed on.

A home buyer would be wiser to buy a foreclosed home than a pre-foreclosed home because you are working directly with the bank. In a short sale, you have to go through the seller or property management and the bank takes some time to tell you if the bank accepts or rejects your offer.

With a foreclosed home, a home buyer can make an offer directly to the bank and know right away if the bank accepts.


Want to know more about buying a pre-foreclosed house? Talk to a local real estate expert like those at Clever! Clever agents are top agents who are local experts. Call us today at 1-833-2-CLEVER or fill out our online form to start.

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