In 2017, there were 676,535 foreclosure filings on U.S. properties, including default notices, scheduled auctions, and bank repossessions.
But not every home that begins the foreclosure process is repossessed. Some owners can find a way to stay in their home, others will run out of time and options and will be foreclosed on, and still, others will be sold in to a cash buyer or sold via a short sale.
Before a lender can take your home, you have to go through the pre-foreclosure process. During this period, you have to figure out whether you can save your home or if you need to walk away.
So what is pre-foreclosure and what are your options for avoiding repossession? Keep reading to find out.
To understand what pre-foreclosure is you should first understand what foreclosure is. Foreclosure is what happens when you fall behind on mortgage payments. This is otherwise known as defaulting on your mortgage payments.
People default on their mortgage payments for any number of reasons. Some of these reasons include:
If you’re unable to make your mortgage payments, the mortgage lender can take possession of your home. They use the proceeds from the home to cover what you owe and pay off the debt. Foreclosure can leave you without a home and with a significantly damaged credit score.
Now that you know what foreclosure is, what is pre-foreclosure?
Pre-foreclosure is the first stage of the foreclosure process. When you don’t pay your mortgage for a few months, the lender can file a default notice on the property. Receiving a default notice means you either have to pay the debt right away or the foreclosure process will begin.
The period of pre-foreclosure begins when the default filing is made on behalf of the lender but before the house is repossessed. It’s the first step of foreclosure, so it’s very serious, but your house won’t be taken during this time.
To avoid losing your home, you need to save it through redemption. Redemption is when you make your missing payments and bring your mortgage current. It can also be accomplished by reaching a loan modification agreement with your mortgage lender.
If you’re unable to get your mortgage current, there are some options available to you. Keep reading to see these options.
If your mortgage lender files a default notice on your property and you’re unable to bring your loan payment to current, there are three options available to you stop foreclosure. You can either modify the terms of your loan, give the lender the deed to your home, or enter into a fast sale.
If you want to try to stay in your home when facing foreclosure, you may be able to modify the terms of your loan with your lender. It is crucial that you investigate this option ASAP because lenders typically work very slowly and time is not on your side.
If you can reach an agreement with your lender and the paperwork is completed on time, then the pre-foreclosure ends and you can keep your home. You’ll be required to make payments moving forward.
Many mortgage lenders are open to attempting to work with you, however, there are strict deadlines and processes you have to follow in order to be considered for a loan modification program. By reaching a loan modification agreement, the bank avoids the hassle of the foreclosure process including eviction and selling the home, and you get to keep your home as long as you begin to make the payments on time again.
When you can’t renegotiate the terms of your loan, you might consider handing in your deed. To settle your debt in this manner you’ll have to talk to your lender. This obviously is not usually the best method for avoiding foreclosure because you will still lose your home, lose your equity in your home, and walk away with no cash in your pocket.
The lender must be willing to accept your deed in lieu of foreclosure before pre-foreclosure ends. Lenders may or may not be open to this option depending on things like the current housing market. This is not a common practice in most markets.
If you can’t redeem your mortgage or negotiate new terms, another option is to sell to a cash buyer enter a short sale. This option involves selling the home for as much as possible and helps homeowners avoid foreclosure.
Reputable investors are uniquely qualified to free you from foreclosure if you act quickly enough. Investors typically have access to cash and can usually close quickly, often times in as little as 7 days. They also buy your home As-Is, meaning you don’t have to make any repairs or updates to your property.
Often times investors can also put some cash in your pocket to help with moving expenses, etc. If you’re looking to sell your house As-Is, make sure you’re dealing with a reputable investor by checking references and looking at online reviews.
Selling your home in a short sale must be approved by your mortgage lender. They’ll consider items such as your financial situation before approving a short sale. They’ll also have to approve your sales contract to make sure they benefit from the sale of the home. Banks do not move quickly and most short sales take months to close once you’ve found a buyer.
If your mortgage lender agrees to let you enter a short sale to avoid foreclosure, then it’s your responsibility to look for an agent, sell the home, and give the money to the bank.
Lenders consider short sales because it reduces the burden on them. The homeowner is responsible for the sale of the home and the bank gets money to cover the debt. But there are some costs and consequences to consider before selling your home in a short sale. Even if you find a buyer, the bank still has to approve the sale, which can take quite a bit of time and back and forth.
In a short sale situation, you walk away without a home. Meaning, you need to find a new place to live.
But the late mortgage payments and past-due bills that led to your foreclosure might have damaged your credit. That can make it difficult to find a new place to live, and that includes buying new homes and/or finding rental properties.
Keep in mind that foreclosure would damage your credit even more. So if it comes down to a short sale or foreclosure, a short sale is the better choice in terms of your credit.
A short sale might also affect you come tax time. If you have a portion of your debt forgiven or canceled, you typically have to report that amount as taxable income. Exceptions include bankruptcy, insolvency, and the Mortgage Forgiveness Debt Relief Act.
To answer “what is pre-foreclosure?”, you first need to know what foreclosure is. Foreclosure is when the bank takes possession of your home as a result of not making mortgage payments. Pre-foreclosure, then, is the period between the lender filing a default notice and the repossession of your home.
To avoid repossession, you can either make your payments or renegotiate your loan. If neither is possible, selling your home quickly may be your only option. If that’s your situation, learn how we can help.
Lisa is a local real estate investor in Austin Texas.