Pre-Foreclosure

Pre-foreclosure refers to the legal situation a property is in during the early stages of being repossessed. Reaching pre-foreclosure status begins when the lender files a default notice on the property, which informs the property owner that the lender will pursue legal action toward foreclosure if the debt isn't paid.

The property owner can pay off the outstanding debt at this point, she can reverse the default status by making up the late payments so the home is no longer in pre-foreclosure, or she can sell the property before it goes into foreclosure.

When a homebuyer takes out a loan to purchase a property, he signs a contract with the lending institution to repay the loan in monthly installments. These monthly installments cover a portion of the principal and interest payments on the mortgage. He's said to be in default if he fails to make payments for at least three months. Pre-foreclosure cannot begin until he is at least three months delinquent.

He will receive a notice of default, which will also be made a matter of public record. This action begins the pre-foreclosure process.

The pre-foreclosure period can last anywhere from three to 10 months. A public auction or trustee sale is arranged at the end of this time.

A pre-foreclosure home that goes 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 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." Not all short sales are pre-foreclosures, however. Homeowners sometimes elect to sell their properties by any means possible before their defaults reach this stage.

A pre-foreclosed home can be inspected by the buyer before making an offer on the home. The buyer could be an investor looking to purchase the property for less than its full market value, then sell it at a higher price for a profit.

If the homeowner lists the property for sale through a real estate agent, prospective buyers will contact the listing agent. The lending bank must approve any short sale and will hire one or more real estate brokers to prepare a Broker Price Opinion (BPO)—an estimated market value based on an analysis of similar homes that have recently sold in the local market. The estimated market value helps the bank decide whether the proposed sales price is acceptable.

• Pre-foreclosure begins when the lender files a default notice on the property because the homeowner is at least three months delinquent with mortgage payments.
• A homeowner might have the option of selling her pre-foreclosure home as a short sale subsequent to lender approval.
• If the homeowner does not cover the past due payments and does not sell the home during the pre-foreclosure period, the lender will eventually sell the property, typically at auction.

A home that is sold during the pre-foreclosure phase can be a win-win-win for all three parties involved. The homeowner is able to sell the property while avoiding the damage that a foreclosure would have on her credit history. The buyer might be able to snag the property for below market value. The lending institution is able to effectively transfer the mortgage to the buyer and avoid the cost of going through a foreclosure.

But buyers of pre-foreclosed homes should be aware of any property liens or unpaid taxes on these homes because these can potentially become their responsibilities after they purchase the properties. The buyer should also factor in the costs of repairs and renovation if the pre-foreclosed home is in a poor state, or he might risk ending up with expenditures that surpass his budget.

If the homeowner does not cover the due payments and does not sell the home during the pre-foreclosure period, the lender will eventually sell the property, typically at auction. The bank owns the property at this point 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.