What is a Foreclosure?
Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of the mortgaged property and selling it. Typically, default is triggered when a borrower misses a specific number of monthly payments, but it can also happen when the borrower fails to meet other terms in the mortgage document.
Understanding Foreclosure
The foreclosure process derives its legal basis from a mortgage or deed of trust contract, which gives the lender the right to use a property as collateral in case the borrower fails to uphold the terms of the mortgage document. Although the process varies by state, the foreclosure process generally begins when a borrower defaults or misses at least one mortgage payment. The lender then sends a missed-payment notice that indicates that month’s payment hasn’t been received.
If the borrower misses two payments, the lender sends a demand letter. This is more serious than a missed payment notice, but the lender still may be willing to make arrangements for the borrower to catch up on the missed payments.
The lender sends a notice of default after 90 days of missed payments. The loan is handed over to the lender’s foreclosure department, and the borrower typically has another 30 days to settle the payments and reinstate the loan (this is called the reinstatement period). At the end of the reinstatement period, the lender will begin to foreclose if the homeowner has not made up the missed payments.
How Long Does Foreclsoreu Take?
Properties foreclosed in the second quarter of 2021 had spent an average of 922 days in the foreclosure process, according to the U.S. Foreclosure Market Report from ATTOM Data Solutions, a property data provider. This is down slightly from the previous quarter’s average of 930 days, and up 34.5%, from 685 days, in the second quarter of 2020.
The average number of days varies by state because of differing laws and foreclosure timelines.
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What is a Pre-Foreclosure?
Pre-foreclosure refers to the first phase of a legal proceeding that ultimately can conclude in a property being repossessed from a defaulted borrower. The lender files a notice of default on the property in pre-foreclosure because the borrowing owner exceeds the contractual terms for delinquent payments.
A notice of default informs the borrowing owner that the lender is pursuing legal actions toward foreclosure. Borrowers have a few options available if they find themselves in pre-foreclosure. Lenders may even be willing to negotiate with them to avoid moving to the foreclosure phase.
How Pre-foreclosure Works
When a home buyer takes out a loan to purchase a property, they sign a contract with the lending institution to repay the mortgage loan according to a contractual agreement, typically with monthly installments. Monthly payments are usually structured to cover a portion of principal and interest payments on the mortgage.
Standard mortgage contracts are often structured to be in default if a borrower fails to make payments for three consecutive months. At that point, the lender is usually contractually authorized to begin pre-foreclosure. When this happens, the borrower receives a copy of a notice of default, which is also made a matter of public record, through a filing with the court. This action begins the pre-foreclosure process, which can take anywhere from weeks to more than a year, as it varies by state and is subject to a court proceeding.
There are several standard steps to a foreclosure proceeding. The notice of default kicks off the proceeding in the pre-foreclosure phase. In general, the lender needs court approval, which must be given by a judge, for their lien on a property.
Lenders are often more willing to negotiate backdated payments and possible loan modifications in the pre-foreclosure stage of a proceeding to avoid paying what can be extensive foreclosure proceeding costs. If foreclosure is granted and a foreclosure eviction notice is authorized, then the lender can move toward a public auction or trustee sale.
Short Sales of Pre-foreclosure Homes
A pre-foreclosure home that a borrower puts up for sale is typically referred to as a short sale. The sale can be a private transaction between the homeowner and the buyer, but the buyer’s offer usually must be approved by the bank before the sale can be finalized. The purchase price may be less than the outstanding loan balance, which is why the sale is said to be short.
Keep in mind that not all short sales are pre-foreclosures. Homeowners who know they are in trouble sometimes elect to sell their properties by any means possible before reaching pre-foreclosure. A buyer can have a pre-foreclosed home inspected before making an offer on it. The buyer could be an investor looking to purchase the property for less than its fair market value (FMV) and then sell it at a higher price for a profit.
If the homeowner lists the property for sale through a real estate agent, then prospective buyers will contact the listing agent. In any short sale, the lending bank will likely need to be involved and may hire one or more real estate brokers or attorneys of their own, particularly to prepare a broker price opinion.
Short Sales of Pre-foreclosure Homes
A home can be sold during the pre-foreclosure phase, which can be a win for all parties involved. By selling, the homeowner avoids the damage that a foreclosure would have on their credit history. The buyer can usually snag the property for below market value. The lending institution doesn’t have to pay the costs of a foreclosure proceeding or sell the property itself.
But selling a property independently is not necessarily easy, mainly since the seller must abide by legalities and disclosure requirements. Buyers of pre-foreclosed homes will need to be aware of any property liens or unpaid taxes on a home because these could potentially be transferred to the new owner without full disclosure or properly documented clauses.
If the homeowner does not make the past-due (and ongoing) mortgage payments, negotiate a modification, or sell the home during the pre-foreclosure period, the lender will eventually be granted authorization of their lien on the property. When this happens, they can evict the owner, subsequently selling the property. At this point, the bank owns the property and is more likely to try to sell the property at an even lower price rather than maintain its ongoing expenses, such as taxes and insurance.
Is My House in Pre-foreclosure?
Before your house goes into pre-foreclosure, you will receive a legal notice of default, alerting you to risk of your house ending up in pre-foreclosure. If you haven't made payments to your mortgage in over three months, it is likely your home will fall into pre-foreclosure, as well.
What's the Difference Between Foreclosure and Pre-foreclosure?
A pre-foreclosure on the house occurs when a notice of default is served after getting court approval. During this phase, a homeowner may be able to negotiate with the lender to preserve the home, usually by paying off their debts. A foreclosure occurs if the lender receives the authority to serve the delinquent borrower a foreclosure eviction notice and then proceeds to hold a public auction to sell the property.
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