What is Pre-foreclosure?

The PropertyClub Team
Jul 7th 2020
Pre-foreclosure occurs when a property owner fails to make payments on their mortgage. Learn more about what it means, how to buy pre-foreclosure homes, and where to find them on sites like Zillow.

What does pre-foreclosure mean?

Pre-foreclosure is part of the financing agreement defining payment terms, including regular monthly installments. Depending on how the loan is structured, the regular monthly installment typically consists of interest payments and a portion of the principal. Debtors are given a grace period to make the regular monthly payments. Failure to make monthly payments for at least 3 months puts the mortgagor in default, triggering a notice of default from the lender. The default notice is a matter of public record and will garner the interest of investors. It is at this point that the property is said to be in pre-foreclosure.

The homeowner can work out various solutions with the lender. 

  1. Reverse the default status by paying all the missed payments together with any interest and penalties due.
  2. Sell the pre-foreclosure home at market price, assuming that market value is higher than the amount owed to the lender. Profits of the sale would be used to pay off the mortgage. The loan provider might need to authorize any offers on the house whether the deal is between buyer and owner or buyer and real estate agent.
  3. Ask for a forbearance modification to restructure the mortgage. The amount in default could be added to the loan balance in addition to fees and penalties. However, keep in mind that the property would still be categorized as pre-foreclosure until the new loan modification is approved.

How pre-foreclosure impacts your credit

Most people understand that foreclosure is a big hit to your credit score, but how much will pre-foreclosure affect your credit?

In general, a big part of your credit score is your payment history, whether late or existing. If you've reached pre-foreclosure, you lender has more than likely recorded your lateness, reporting it to credit-reporting agencies. Future lenders will be able to see that you fell back on payments, making it more difficult to get future loans and credit lines.

Fortunately, if you can get a home out of pre-foreclosure, your credit will not be lowered as much as it would if the bank foreclosed on the property. 

Foreclosures and Pre-Foreclosures spike in weak real estate markets

In 2008 during the Housing crash, the real estate market spiraled downward. Foreclosures ended up being prevalent even amongst long-time property owners who had also taken advantage of easy credit and growing equity during the years of the real estate bubble.

For those with resources and liquid cash, the housing market was ripe with opportunities to purchase foreclosed and pre-foreclosure properties. Understanding the distinct features of various kinds of distressed properties is the key to taking advantage of extraordinary opportunities in a market-driven by extraordinary conditions.

You can find houses in pre-foreclosure on Zillow

If you're in the market for a home in pre-foreclosure one of the best places to start is on Zillow. To see Zillow pre-foreclosure listings just start a search in your desired area, select homes for sale, and click on the "foreclosures" button. You'll also see foreclosed homes as you can't filter to see only pre-foreclosures on Zillow. 

Buying pre-foreclosure homes

For the homeowner, a pre-foreclosure sale is a chance to sell a property they can no longer manage at a possibly higher price compared to a foreclosed property. Additionally, the seller avoids getting a foreclosure recorded on their credit history, which can be really damaging to their credit rating and hurt your chances of getting another home loan.

For buyers, a pre-foreclosure means that this is an excellent opportunity to buy a house in good condition at a reduced price. Owners do not usually leave or desert their property at this phase of the foreclosure process, so the property is typically in good condition. Investors in the market for a quick flip generally favor pre-foreclosure as they usually require fundamental upkeep rather than a significant rehab to be market-ready.

Since they are spared the expenses and obligation of preserving and protecting the property, it is likewise a win-win circumstance for lenders. In most cases, the buyer may utilize the exact same loan provider, helping with a seamless transfer of ownership.

How to make an offer on a house in pre-foreclosure

The simplest way to buy a pre-foreclosure house is to assist the seller in paying the delinquent payments to the lender and afterward, work with the seller to buy the home directly from the seller. One particular issue with this circumstance is some sellers do not wish to sell their house.

It is sometimes beneficial and profitable for investors to deal directly with the seller because the seller might not have an accurate idea of how much their home is worth. The investor is most likely planning to purchase the home for much less than it is worth and possibly offer the seller a few thousand dollars to move.

Some states have passed laws to protect vulnerable homeowners dealing with foreclosure proceedings because many sellers fall victim and end up entering into bad deals when they are in the pre-foreclosure state. A few of these laws provide sellers in default the right to rescind a deal after a specific amount of time and, if that right is not provided to the sellers, the sellers may be able to get the house back.