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When you are behind on your mortgage payments, your lender may possibly repossess your home to recoup the loss. But that won’t happen right away. Lenders must follow a series of steps that begin with pre-foreclosure.
During this first phase of the foreclosure process, you may have the opportunity to rehabilitate your mortgage and keep your home. Here’s what you need to know about pre-lockdown to prepare.
What is a pre-seizure?
Pre-foreclosure is a legal procedure that a lender can undertake when a borrower misses several consecutive mortgage payments. The lender will send the borrower a Notice of Default, which is a legal notice that initiates the pre-foreclosure phase.
The borrower has a few options at this point:
- Catch up on payments
- Sell the house
- Arrange for a loan modification
If none of this happens during pre-foreclosure, the lender can start foreclosure proceedings.
How does the pre-entry process work?
When you take out a home loan, you sign a mortgage agreement that says the bank can get your property back if you stop making payments. If one of your payments is just a few days late, there’s usually nothing to worry about as lenders often offer a 15-day grace period after the due date. If you make a payment within this two-week period, you generally won’t incur any fees or damage your credit.
However, here is what could happen after this grace period:
- Your lender reports your missed mortgage payment. After 30 days, your loan servicer may report the missed payment to the credit bureaus and charge late fees. They are required to contact you after 36 days without payment, although they may contact you sooner.
- The loan officer assigns someone to your file. Once your payments are 45 days past due, someone will be assigned to your file. This representative will help you understand your options and answer all your questions. When you reach the 60 day mark, you may incur a second late payment penalty and the late payment will be reported to the credit bureaus.
- You receive a formal notice. You will receive this letter after missing three consecutive payments. The loan officer will give you 30 days to update the loan before starting the foreclosure process. Additionally, the loan servicer may report the last missed payment to the credit bureaus and charge additional late fees.
The default notification kicks off the pre-locking phase. Depending on the state where you live, the loan officer may add the notice to a public list of borrowers who are subject to foreclosure. After you’ve missed payments for 120 days and haven’t made arrangements to repay the money, your loan officer may seek court approval to place a lien on your property. This begins the official foreclosure process.
Pre-entry vs entry
The pre-foreclosure phase begins when a loan servicer sends the borrower a notice of default. This usually happens after the borrower skips three consecutive mortgage payments without attempting to contact the loan officer.
A pre-foreclosure borrower still owns their home and has several options. They can sell the home, either through a short sale or a regular sale, or work with the lender to catch up on payments. Lenders may be able to enroll the borrower in a special payment or relief plan during this time.
But if the borrower doesn’t sell the home or pay back what’s owed, the lender can start foreclosure proceedings. They will usually need to get court approval to place a lien on the property. This can happen once the borrower misses four mortgage payments. The lender takes possession of the property at this point and can sell the house.
Can the pre-seizure be stopped?
You can usually stop pre-foreclosure by catching up on any mortgage payments you’ve missed. It’s a good idea to contact your loan manager as soon as possible and let them know that you are taking steps to make this happen. They will stop the pre-foreclosure process once your home loan is in process.
Point: You can hire a housing counselor to help you understand your options.
Can I buy a house that is in pre-foreclosure?
Yes, you can buy a house that is pre-foreclosure. These homes may not be on the market because the owner may be trying to remedy the defect. But some pre-foreclosure homes are listed on websites such as REDX, Foreclosure.com, or local multiple listing services.
If you find someone who wants to sell their pre-foreclosure home, you can work with a real estate agent to submit an offer and negotiate the details. However, you may need to act quickly. The owner may only have a few weeks before the lender puts the house up for auction. The home is considered foreclosed after the auction, after which you will need to work with the lender to purchase the home.
What to do if your home is in pre-foreclosure
If you are behind on mortgage payments, you may be able to avoid foreclosure. The following options generally have less of an impact on your credit and finances.
Refinancing your mortgage involves taking out a new home loan, ideally with a lower interest rate. If you paid off part of the original mortgage, your new payments will be lower because the mortgage is based on a lower balance.
You can also refinance to switch from an adjustable rate mortgage (ARM) to a fixed rate loan. This could prevent your monthly payments from increasing.
Request a loan modification
With a loan modification, you will permanently change the terms of your home loan. Your loan officer may be willing to negotiate a loan modification if you have documented financial difficulties. They could, for example, extend the term of your loan or reduce your interest rate to make your monthly payments more affordable.
Sell the house
You can avoid foreclosure by selling your home and potentially making a profit. US home prices are up 13.5% in August 2022 compared to August 2021, so you may be able to sell the home for more than you originally paid.
But if the value of your home has dropped for some reason, your lender may approve a short sale. It’s when someone buys your house for less than you owe on the mortgage.
Offer a deed in lieu of foreclosure
If none of these options work for you, you may consider offering a deed in lieu of foreclosure. With this type of arrangement, you will sign the deed to your home to your loan officer and move out. In exchange, the repairer releases you from your mortgage obligations.
Related: 7 ways to get out of your mortgage
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