What Is Preforeclosure?

How do preforeclosures work?

Preforeclosure is the first step in the foreclosure process. It’s the period after you’ve defaulted on your mortgage, but before the lender takes possession of your home. Usually, you won’t face preforeclosure until you've missed three monthly payments. At this point, the loan is in default, and the mortgage lender must follow a legal process to proceed with foreclosure.

The preforeclosure period is an opportunity for the homeowner to pay off the outstanding debt or potentially sell the property before it goes into foreclosure. If not resolved, this process can ultimately result in the property being repossessed by the lender.

Once in preforeclosure, the lender or servicer will send you a notice of default, which is a legal document that alerts the borrower of their failure to fulfill the obligations outlined in the mortgage agreement. It may also state the actions the lender intends to take if the payments aren’t made current.

The notice of default is also filed with the local recorder’s office in case the lender has to file a lawsuit later. Generally, the lender moves forward with foreclosure within 30 days of sending this notice.

How long does preforeclosure last?

The length of time you have between preforeclosure and foreclosure varies by state, but foreclosure usually can’t start until you’re at least 120 days behind on your mortgage payments, according to the Consumer Financial Protection Bureau (CFPB). The specific rules and timelines for preforeclosure can also vary based on the terms of the mortgage agreement.

Some lenders move quickly through the foreclosure process, depending on whether foreclosure is judicial, meaning a court hearing and order are required, or nonjudicial, meaning court action isn’t required.

How preforeclosure affects your credit

While preforeclosure is not a specific entry on your credit report like foreclosure is, the missed payments are reported to credit bureaus, which can bring your score down significantly. Your payment history makes up 35% of your FICO credit score.

In comparison, foreclosure has more severe penalties to your credit and will stay on your credit report for seven years. This entry can be a red flag to any potential lenders if you want to buy a house again or to landlords if you plan to rent.

» MORE: How to build credit

How to avoid foreclosure

If you think you’ll miss a mortgage payment or have already skipped one, it’s important to contact your lender as soon as possible to discuss your options. One option your lender may present is mortgage forbearance, which is a temporary pause or reduction in payments.

“A lot of lenders and banks will work with you if you are falling behind in your mortgage payments,” said Maureen McDermut, a real estate agent in Santa Barbara, California. “Upfront communication will help you understand what your options are, and the truth is mortgage companies do not want you to default or go into foreclosure, so they will often allow you to set up alternative arrangements.”

“A lot of lenders and banks will work with you if you are falling behind in your mortgage payments.” — Maureen McDermut, real estate agent in Santa Barbara, California.

Fortunately, preforeclosure doesn’t mean foreclosure is inevitable. You can take some steps to halt the foreclosure process.

1. Contact HUD for counseling

McDermut recommended contacting the U.S. Department of Housing and Urban Development (HUD), which offers a list of housing counseling agencies that can assist you.

Foreclosure avoidance counselors are free in every state, so be wary of anyone asking for a fee or claiming to be a foreclosure counselor who is not HUD-approved. Your counselor will help you determine the next best steps and help you apply for a loan modification or refinance program if you are eligible.

2. Refinance your mortgage

One way to prevent foreclosure is to refinance your mortgage, which essentially restarts your mortgage. Depending on your current credit score, a refinance can help you secure a lower interest rate or extend your loan term, which can lower your monthly payment. If your home’s value has increased since you purchased it, refinancing could lower your monthly payments and help you eliminate private mortgage insurance (PMI).

» MORE: How to lower your monthly mortgage payments

3. Ask about loan modification

Some lenders might let you modify your mortgage terms, making your payments more affordable. Loan modification is different from refinancing and could involve extending the term of the loan, reducing the interest rate or even deferring some of the principal.

Loan modification options can vary by lender. And as Robert, a reviewer in Connecticut found out, it’s important to not take lenders solely on their word.

“[My lender] told me they would modify the loan and put the deferred payment [...] at the end of the loan,” he said. “Now [they tell] me they wouldn't do that and are demanding the entire $19,000 payment at once and will be foreclosing on me[.]”

» MORE: Loan modification vs. refinance: how to decide

4. Opt for a short sale

A short sale is when a lender allows a struggling borrower to sell their home for less than what they owe on their mortgage. The lender could require you to pay the difference or grant you a waiver of deficiency, forgoing its rights to collect the remaining balance. You might decide to go with a short sale even before preforeclosure if you’re worried you won’t be able to make future mortgage payments.

By selling the home, you can use the proceeds to pay off the mortgage debt and potentially avoid the negative consequences of foreclosure. It’s important to act quickly and work with a real estate professional who has experience in preforeclosure situations, as there may be time constraints and specific requirements to navigate.

However, it could take some time to sell your home, even at a deeply discounted price. A short sale may not be an option for everyone, depending on how far along you are in the process, so it’s critical to contact your lender earlier rather than later to discuss your alternatives. Your lender will have to approve any short sale.

Bottom line

Lenders must follow a specific legal process in order to foreclose on a property. The first step is sending a notice of default, which signals preforeclosure and lets the borrowers know the foreclosure process has begun.

The most important action to take if you’re in default is to contact your lender or servicer as soon as possible, preferably before you miss any more payments. The sooner you make the lender or servicer aware of the problem, the more likely it is that it can offer a solution that will help you stay in your home. You can also seek out foreclosure avoidance resources from your state’s housing agency.