What are Preforeclosure Homes? Plus, How to Buy One

Key takeaways:

• Preforeclosure is the period after missed mortgage payments but before formal foreclosure.
• State laws significantly impact the preforeclosure process and timeline.
• Buying a preforeclosed home can offer opportunities but requires careful due diligence.

When a homeowner struggles to make mortgage payments, their home enters a stage called preforeclosure. This period, which occurs before a formal foreclosure, offers a window of opportunity for both the homeowner and potential buyers. Understanding preforeclosure can help homeowners avoid losing their property and provide buyers with unique investment opportunities. This Redfin Real Estate blog shares what you need to know as a homeowner trying to navigate a preforeclosure or if you’re a buyer searching for preforeclosure homes. Now, let’s get started.

What is a preforeclosure?

Preforeclosure is the period after a homeowner defaults on their mortgage payments but before the lender initiates a full foreclosure. During this time, the homeowner is in arrears but still owns the property. The lender has not yet taken legal action to reclaim the home. This phase is intended to give the homeowner a chance to remedy the situation and prevent the property from being foreclosed upon.

How the preforeclosure process works

The preforeclosure process typically follows a series of steps, beginning with missed payments and culminating in potential resolution or formal foreclosure.

1. Lender’s notice of default

The preforeclosure process officially begins when a lender issues a Notice of Default (NOD) to the homeowner. This notice informs the homeowner that they have missed a specified number of mortgage payments and are in default of their loan agreement. The NOD outlines the amount owed, including missed payments, interest, and any penalties. It also states the lender’s intent to foreclose if the default is not cured within a certain timeframe, which varies by state.

2. Review your state law

State laws significantly influence the preforeclosure timeline and available options. Some states have longer preforeclosure periods, offering homeowners more time to resolve the issue. Other states have quicker processes. 

It’s crucial for homeowners to understand the specific laws in their state regarding default notices, grace periods, and homeowner rights during preforeclosure. These laws can dictate the steps a lender must take before a property can be foreclosed.

3. Address missed payments or initiate home sale

Once a homeowner receives a Notice of Default, they have several options to address the situation. The most direct approach is to catch up on missed payments, including any fees and penalties. If this isn’t feasible, homeowners can explore options such as loan modification, a repayment plan, or forbearance with their lender.

Alternatively, selling the home during preforeclosure is a common way to avoid foreclosure. A short sale, where the home is sold for less than the outstanding mortgage balance with the lender’s approval, is one possibility. Another option is a regular sale, where the homeowner sells the property to pay off the mortgage and avoid further damage to their credit.

Drawbacks of preforeclosure occuring

While preforeclosure offers a chance for resolution, it comes with significant drawbacks for the homeowner. The most immediate impact is a severe hit to their credit score, making it difficult to secure new loans or credit in the future. The stress and uncertainty of potentially losing one’s home are also considerable. Furthermore, public records may show the Notice of Default, which can attract unwanted attention from investors.

Resolving a preforeclosure as a homeowner

Homeowners have several avenues to resolve a preforeclosure.

• Reinstate the loan: Pay all missed payments, fees, and penalties in a lump sum.
• Repayment plan: Negotiate a plan with the lender to pay the overdue amount over time.
• Loan modification: Work with the lender to change the terms of the mortgage, such as the interest rate or loan term, to make payments more affordable.
• Forbearance: Temporarily suspend or reduce mortgage payments for a set period.
• Sell the home: Sell the property to pay off the mortgage, either through a traditional sale or a short sale.
• Deed in lieu of foreclosure: Voluntarily transfer the property’s title to the lender to avoid foreclosure.

How preforeclosure differs from foreclosure

The key difference between preforeclosure and foreclosure lies in ownership and legal status. In preforeclosure, the homeowner still retains ownership of the property, despite being in default. They have opportunities to resolve the default and avoid losing the home. 

Foreclosure, on the other hand, is the legal process by which the lender takes ownership of the property due to the homeowner’s continued default. Once a home is foreclosed, the homeowner loses all rights to the property.

Buying a preforeclosed home

Buying a home in preforeclosure is certainly a possibility, especially if a homeowner doesn’t intend to resolve the preforeclosure. These properties can sometimes be purchased below market value, but they often come with complexities.

• Direct from homeowner: Buyers can negotiate directly with the homeowner to purchase the property before it goes into full foreclosure. This requires the homeowner and lender to agree on the sale.
• Understanding the risks: Buyers should be aware of potential liens, necessary repairs, and the need for patience, as these transactions can be complex and time-sensitive.
• Legal guidance: It’s advisable to seek legal counsel to navigate the intricacies of buying a preforeclosed property, ensuring a smooth and legally sound transaction.

Frequently asked questions:

Q: How long does preforeclosure usually last?

A: The duration of preforeclosure varies by state laws and the lender’s policies, but it typically ranges from a few months to over a year.

Q: Can a homeowner stop a preforeclosure?

A: Yes, a homeowner can stop a preforeclosure by resolving the missed payments or through other arrangements with the lender, such as a loan modification or selling the home.

Q: Is buying a preforeclosure home risky?

A: Buying a preforeclosure home can be risky due to potential hidden liens, necessary repairs, and the complexity of the transaction. Due diligence and legal advice are highly recommended.

Q: What happens if a homeowner does nothing during preforeclosure?

A: If a homeowner takes no action during preforeclosure, the lender will eventually proceed with the formal foreclosure process, leading to the homeowner losing the property.