The last thing that a homeowner wants to hear is that their home is in danger of foreclosure. But before foreclosure truly kicks off, a home enters the pre-foreclosure process.
Not sure what a pre-foreclosure home means or how it affects your financial plans? Today, let’s break down pre-foreclosures and explore what you can do during the pre-foreclosure phase before your home is repossessed or sold at a foreclosure auction.
Pre-foreclosure is part of the broader foreclosure process. A home goes into foreclosure when its borrower or homeowner defaults on the loan, usually for a period between three and six months.
The pre-foreclosure process is the first phase of legally foreclosing a property and repossessing that home from a defaulted property owner. It has several distinct stages.
Most importantly, pre-foreclosure proceedings offer the borrower the ability to avoid foreclosure through repaying any missed payments or interest payments that may have accumulated or by negotiating with their lender in another way.
Four distinct stages define the pre-foreclosure phase of a foreclosure process.
First, the borrower or homeowner defaults on their mortgage loan monthly installments. In most cases, “default” just means that the homeowner has missed one or more payments. Most lenders will not typically initiate the pre-foreclosure process until the homeowner misses multiple monthly payments in a row.
However, the homeowner can also default on their loan if they breach one or more loan clauses or conditions. For example, if they intentionally destroy the property when they are not supposed to per their mortgage agreement, they may also be found to default on their loan.
A lender cannot force a foreclosure if a borrower is not in default.
Next, either the lender or the borrower will contact the other party in the mortgage contract. In most cases, it’s the lender contacting the homeowner, but the homeowner can also get ahead of foreclosure if they know they will not make mortgage payments on time in the near future.
This can be a major point in a homeowner’s favor because it shows that they are trying to work out an arrangement with their lender instead of avoiding a confrontation. Regardless, foreclosures cannot normally proceed unless both the lender and the borrower are aware of the default condition of the mortgage.
At this stage, the lender will send the homeowner an official notice of default or NOD. This serves as a legal public notice and a precedent if the lender ever needs to pursue judicial foreclosure (in which case they need authority from a court to go through the foreclosure process).
The default notice will inform the current homeowner that they are in default on their loan and have a set amount of time (usually between 30 and 90 days) to repay any outstanding loan balance on their mortgage before foreclosure continues.
If the homeowner does not repay their debt or come to an alternative agreement with their lender, a court may grant foreclosure authorization. If a borrower and lender are in a state that does not require judicial foreclosures, the lender may simply decide to proceed with foreclosure of their own volition.
The pre-foreclosure listing concludes when the lender repossesses the home and begins setting up an auction to sell the home and recover profits from the buyer to recoup their losses.
Once you have a pre-foreclosure home, does that mean you can’t do anything to save your property and your mortgage? Not at all.
The first thing you'll want to do it speak to your lender about alternatives to foreclosure, like a loan modification. Let's review other alternatives to avoid foreclosure.
For starters, you can pursue a loan refinance or modification to your existing loan with your lender.
Lenders do not typically want to follow through with a foreclosure. Foreclosures are costly in both time and money, and lenders rarely recoup the full costs of the mortgage or property. Because of this, they want you to be able to keep making monthly payments and eventually pay down the mortgage in full, even if it takes longer than you originally agreed.
Many lenders will agree to refinance your loan if you have a good credit score or a good payment history so far. However, for most in this situation their poor payment and credit score will make it difficult to qualify for a refinance. You can alternatively request a mortgage forbearance, in which you stop making mortgage payments for a few months to pay for other costs or financial obligations. Then you repay your lender with the amount you’ve accumulated plus interest. It's important to note that a lender may require a lump sum payment once forbearance ends.
Alternatively, you can try to refinance your mortgage through another lender or financial institution to get a mortgage with better terms.
Or, you could try to short sell your property. With a short sale, you sell your home for less than the market value or less than the total amount remaining on your mortgage loan. But the lender benefits because they recoup some of their costs quickly. In many cases, you, the seller, can exit a mortgage contract without having to pay back any more money that may be delinquent on your account.
However, a lender has to approve a short sale before you can go through with it. You’ll need to talk with your lender to work out an agreement if you want to pursue this strategy.
Balance Homes offers an innovative, affordable, and flexible way to retain ownership of your home, avoiding a foreclosure and providing additional cash to help improve all your finances. Through co-investing, Balance provides cash in exchange for a share in your home's future value. You get out of pre-foreclosure, stop the foreclosure process, and remain in your home as an owner.
Here’s how it works:
This unique way to co-own your home could be just what you need to retain ownership during hard financial times and get a fresh start.
Lastly, you can also offer to give your lender a deed in lieu of foreclosure. With such a deed, you transfer ownership of the property back to the lender in exchange for relieving yourself of any further mortgage obligations or fees.
Some lenders may agree to this so they can recover ownership of the property and quickly sell it to another person, especially if you don’t have much money owed left on your mortgage. However, if your mortgage still has quite a bit of money on it, your lender may not agree to this idea.
While pre-foreclosure can be alarming, it's far from the end, and it doesn't mean that you have to leave your home immediately. Pre-foreclosure offers several opportunities to get things back on track, especially if you contact Balance Homes.
Whether you want to co-invest with Balance Homes or pursue some other means of rebalancing your mortgage, we can help. Contact us today for more information, and don’t hesitate to ask us questions about co-investing and how our unique process works.