3 Ways to Get Out of Preforeclosure on Your Home

Purchasing a home can be a large financial risk — from both the perspective of the buyer and the mortgage lender. As you’re learning about the real estate market and preparing to buy a house, one term that you might encounter is preforeclosure. 

Preforeclosure is a serious step that happens when a borrower defaults on their home loan and the mortgage lender takes legal action. Whether you’re a first-time homebuyer or looking to buy a vacation home, it’s helpful to understand what preforeclosure is. Here’s a closer look at what preforeclosure means and what steps a potential buyer can take to avoid this. 

What Is Preforeclosure?

Preforeclosure occurs when the borrower has failed to fulfill their contractual terms and defaulted on their mortgage payments. The mortgage lender will take steps to issue a notice of default. This court-filed public document will state that the borrower has breached their mortgage contract and missed payments on their mortgage loan. 

The document also serves as a legal notice to inform the borrower that they will be moving toward foreclosure action if the agreed-upon mortgage payments do not resume. The public record is then filed with the county recorder. According to the U.S. Department of Housing and Urban Development, most mortgage companies start the foreclosure process when the borrower is three to six months behind on payments. 

What’s the Difference Between Preforeclosure and Foreclosure?

The preforeclosure stage is one of the first steps that a lender will take upon a missed payment. Meanwhile, a foreclosure is the final step, when lenders recoup their losses by repossessing a property. When a home is foreclosed on, the homeowner is evicted from the home and this lack of payments will severely impact their credit score.

Steps of the Preforeclosure Process

A notice of default is one of the first steps that a lender will take upon missed payments and signifies the start of the foreclosure process, unless action is taken otherwise.  Here’s a closer look at what happens during the preforeclosure process.

Receiving a Notice of Default Letter

Once a borrower misses their loan payments, the mortgage lender will send a notice of default. After this point, the borrower has 90 days to fulfill their overdue payments. If not, the lender will continue to advance towards foreclosure of the home. 

House Repossession 

If the borrower is unable to pay the overdue payment in the 90 days, the lender will move to issue a notice of trustee’s sale. This publicly issued document will give the notice that the borrower’s home is now facing foreclosure and will be sold by a trustee within a certain amount of time. A trustee does not represent the homeowner or lender. Instead, they are a neutral third party who facilitates the foreclosure process.

The document will inform the borrower that their house is going up for auction and include information about the auction, such as the date or location. Oftentimes, this auction may occur within a few weeks from the time that the notice of trustee’s sale was first issued, although this may vary from case to case. 

During this time, the borrower can still take the steps to pay back the amount owed, although time is of the essence. 

Trustee Sale of House 

The final step in the foreclosure process is the trustee sale, also known as a foreclosure auction, where the borrower’s house is put up for auction. The auction is operated by the trustee, who works to carry out the directives from the lender. 

The home is then sold to the highest bidder and the new owner takes possession of the home, effective immediately. If the trustee is unable to sell the home during a public auction, the lender will most likely hire a real estate agent to list and sell the house. Oftentimes, a foreclosed property will sell below market value.

3 Ways to Avoid Preforeclosure

If you find yourself in a situation where you receive a preforeclosure notice, you don’t want to ignore the issue. Address the problem immediately and consider your options to figure out the best course of action for your unique situation. 

1. Pay the Remaining Loan Balance

The easiest way you can avoid foreclosure is by paying the outstanding balance on the loan, along with any late fees or penalties that have accrued. Most mortgage lenders will halt the preforeclosure process once the borrower pays the overdue balance.

2. Ask for a Loan Modification

Paying the remaining loan balance might not always be an option, depending on your financial situation. If that’s the case, a good place to start is by contacting your mortgage lender to discuss options. 

You might have the option to refinance your loan, where the borrower will pay off the current loan with proceeds from a new loan. While requesting a loan modification might come with processing fees, this can be a good option if you’ve had a change in your monthly income or financial situation.

3. Request Forbearance 

A mortgage forbearance enables the borrower who is struggling financially to put a pause on their monthly payments for a set period of time. This agreement, made between the borrower and mortgage lender, provides the homeowner with time to get their finances in order and prepare to continue making regular payments.

Other Common Questions About Preforeclosure

Now that we’ve gone over what the preforeclosure process looks like and how to avoid it, here are some common questions about preforeclosure. 

What’s in a Notice of Default? 

The information required on a notice of default varies from state to state. However, it typically contains the following information: 

• The name and addresses of both the borrower and lender
• The legal address of the property in dispute
• The description of the property
• The nature of the default
• Steps required of the borrower to solve the default
• Information about the lender

Is It Bad to Buy a Foreclosed House? 

As you’re browsing houses for sale, there’s a good chance you might encounter a house that is listed as foreclosed. Foreclosures are typically less expensive, but it’s important to know that this purchase can be riskier than a home with a clean title. 

Foreclosed homes are sold during public actions in as-is condition, which means the buyer will be responsible for repairs as well as any unpaid liens. Oftentimes, foreclosures are in poor condition and may require extensive remodeling and maintenance. Additionally, the majority of the time, homes listed for sale at auction are not available for inspection, so the potential buyer will be buying at their own risk. 

How Long Does Foreclosure Stay on Your Credit Record?

Record of a foreclosure will stay on your credit report for seven years from the date of the first missed mortgage payment. Additionally, it can also make it more difficult to secure a loan in the future as some lenders might be hesitant to approve an application where the credit score shows a foreclosure.

Get Homebuying Guidance With Aalto

As a potential first-time homebuyer, it’s important to have your finances in order so you can avoid preforeclosure on your home. By working with Aalto, a self-service real estate platform, you’ll be better equipped to face the homebuying process. At Aalto, our platform will guide you through each step of the homebuying process, providing you with assistance and representation. 

Not only can you look forward to a simplified process, but there’s plenty of other perks that buyers can experience. For instance, you’ll have access to hundreds of exclusive listings and the opportunity to receive up to 1.5% cash back when you buy a home. Sign up on Aalto today and start the process of finding your dream home.