What Does Pre-foreclosure Mean?
Pre-foreclosure means that a property owner has failed to make payments on their mortgage. 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.
- Reverse the default status by paying all the missed payments together with any interest and penalties due.
- 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.
- 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.
What Should You Do if Your Home Goes Into Pre-Foreclosure?
The best thing to do if your home goes into pre-foreclosure is to avoid panicking and make a plan. Decide if you want to stay in the house or if you're ready to cut your losses and walk away. If you want to stay in the home, there are a few steps you can take.
You can approach the lender and see if you can negotiate a deal, such as entering a mortgage forbearance program or refinance at a lower rate. You could also ask friends and family to loan you the money to help you get back on your feet or take out a personal loan. But, if you're prepared to walk away, you should look for a cash buyer willing to offer you a quick close.
How Does Pre-Foreclosure Affect Your Credit?
While pre-foreclosure won't impact your credit as much as a foreclosure, it will still have a negative effect on 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, your 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.
It depends on how many payments you've missed. Once a loan payment is 30 days late, it will be reported to the credit bureaus. Each month you miss a payment and do not pay back what you own, the impact will worsen, and you'll notice your score drop substantially. However, there is no official entry on a credit report for pre-foreclosure, which means the impact won't be as substantial as if you were actually in foreclosure. But the more payments you miss and the longer you go without paying back what you owe, the harder it will be to repair the damage.
How to Buy a Home in Pre-Foreclosure
Homes in pre-forclosure offer exciting opportunities for investors looking for a solid deal on an investment property. The sellers are motivated to move quickly and may be willing to accept a discounted price. However, unlike buying a short sale at auction or directly from the bank, you may have the opportunity to view the property beforehand and speak directly to the seller.
1. Search for Preforeclosure Properties
The first step to buying a home in pre-foreclosure is to find listings and reach out to the owner. You can do this by going down to your local county recorder's office and searching for properties with a notice of default or notice of sale. These notices are issued to homeowners in pre-foreclosure and will include their contact info. You can also use online resources like Zillow, Foreclosure.com, Realty Trac, Homesteps.com, or Homepath.com.
Zillow is a Great Place to Find Pre-Foreclosure Homes
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.
2. Submit Offers
Once you've found a pre-foreclosure listing you like, reach out to the owner and submit a fair offer. From there, the process is no different than purchasing any other home. You will need to have the cash or proof of financing available and negotiate with the seller to arrive at a fair price.
3. Close on the Home
After that, you will do your due diligence and close on the sale. Homeowners in pre-foreclosure will typically want to move quickly to avoid additional pressure from their lender, so you likely won't have as much time to negotiate over minor details. But if you're looking for an investment property, chances are you'll also want to move quickly.
Is it Possible to Avoid Pre-Foreclosure?
Yes, avoiding pre-foreclosure is possible by simply making all your payments on time. If you start getting behind, it is always better to be proactive and contact your lender or make another plan. Lenders will likely cut you a deal if you approach them directly before you've missed any payments. But if you wait until the last minute, they may be more hesitant or offer you less favorable terms. If you feel like you're in over your head and won't be able to afford the payments any longer, you should list the home before you go into pre-foreclosure. The longer you wait, the more leverage you give the buyer. So the sooner you act, the more likely you are to receive a solid offer.
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.
Should You Buy a Pre-foreclosure House?
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 them. 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.
Pre-Foreclosure Bottom Line
Going into pre-foreclosure isn't the end of the world, so if you find yourself in that predicament, don't panic. Instead, take stock of your situation and weigh your options so you can turn things around without damaging your credit too severely. First, contact your lender and look for a cash buyer if all else fails. You'll find a solution if you set realistic expectations and take decisive action.