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Preforeclosure typically begins after three months of missed mortgage payments.
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Preforeclosure is the first step in the foreclosure process.
After several missed payments, this lets you know that your lender wants to repossess the property.
Homeowners who act fast during preforeclosure can avoid foreclosure.
If you fall too far behind on your mortgage payments, your lender may initiate the preforeclosure process.
“It is primarily a final warning, and homeowners are not evicted during the preforeclosure process,” says Levon Galstyan, an accounting consultant at Oak View Law Group.
Instead, a preforeclosure can serve as a wake-up call for homeowners to adjust their spending or ask their lender for leniency. “The borrower has one last chance during this phase to fix the default status of their loan,” Galstyan says.
What is preforeclosure?
A homeowner who is behind on mortgage payments may get a notice of default document from their lender, marking the start of the preforeclosure process. In most cases, lenders wait until the borrower has missed at least three mortgage payments to send this notice.
Essentially, this is the lender’s first step toward reclaiming the property. The exact timing of this process varies depending on the lender and your state. In general, you can expect to stay in preforeclosure for 30 to 120 days. During the preforeclosure phase, homeowners have a few options to avoid moving toward a final foreclosure ruling.
Quick tip: If you hit a financial rough patch, do your best to communicate the issue with your lender as soon as possible. Some lenders are willing to offer a temporary reprieve to borrowers who have a solid history of on-time payments.
How preforeclosure works
When a homeowner falls far enough behind on mortgage payments, the lender will send a notice of default. The document signals that the lender is pursuing legal action to potentially repossess the home. Typically this happens after you have missed three or more monthly payments.
In addition to letting the homeowner know, the lender puts this information into the public record by notifying the County Recorder’s office.
Once the preforeclosure is public record, potential homebuyers may express interest in purchasing the property. Although this will get the property off your hands, many buyers of a preforeclosed home are interested in locking in the deal below market price, which may not be the best financial move for you.
How to get out of preforeclosure
A preforeclosure notice doesn’t mean that the lender is planning to repossess your home tomorrow. Instead, it starts a legal process. As the homeowner, you’ll have several options to mitigate the damage to your credit and the possibility of losing your home:
Catch up on missed payments: If you can catch up on your missed payments, that can get the loan back on track. As you work to catch up, “it’s important to let your lender know that you’re taking the necessary steps to get out of preforeclosure, and will be submitting payments in a set time frame,” says Henry Abenaim, founder of Fundingo, a loan management software company.Work out a loan modification: “If you are in preforeclosure, you may want to consider negotiating with your lender to modify your loan,” says Alex Capozzolo, cofounder of SD House Guys, a home-buying company in San Diego, California. “This could involve extending the term of the loan, lowering the interest rate, or changing the type of loan.”Refinance: For those with sufficient home equity and a reliable income, a refinance could be on the table. Make sure to lock in a realistic monthly payment for your long-term financial situation. Short sale: If you sell your home during the foreclosure process for less than the outstanding loan balance, that’s a short sale. Since the lender is accepting less than the total owed, homeowners must get approval from the lender before moving forward. Pay off the balance: Paying off the entire loan balance isn’t usually an option if you’re struggling just to make monthly payments. But if you are able to pull the funds together, that should prevent further action from your lender. It might be worth tapping into any available savings or asking for a helping hand from your family or friends. Surrender the home through deed in lieu of foreclosure: If you can’t work out a new financial arrangement or find a buyer, you can surrender the home’s deed to your lender. After you sign over the deed, you must leave the property and the lender will assume all ownership rights.
Does preforeclosure affect my credit?
Even if the lender doesn’t foreclose on your property, preforeclosure can have a negative impact on your credit since “missed mortgage payments will be reported to the credit bureaus,” Capozzolo says.
Since your payment history accounts for 35% of your FICO score, missed payments of any kind hurt your credit. However, avoiding foreclosure itself can protect your credit score from more extensive damage.
Quick tip: Communicate the details of your financial situation to your lender. In some cases, they may be willing to work out a new payment arrangement with you.
A foreclosure will remain on your credit report for seven years, making it challenging to obtain financing in the future. With that, avoiding foreclosure is the priority for homeowners in the preforeclosure stage.
The bottom line
If you find yourself in preforeclosure, it’s critical to consider your options carefully. But don’t spend too much time mulling things over because time is of the essence.
Never be afraid to seek out help from a professional. There are HUD-approved housing counselors in every state who have experience helping homeowners through this tough situation.