What is preforeclosure?

What happens once your mortgage is in default

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Life can throw unexpected financial challenges your way, which can put the stability of your homeownership at risk. Foreclosure is never an ideal situation for a homeowner, but the process of preforeclosure can give you one last chance to find an alternative before it is too late.

According to ATTOM, a real estate data company, there were foreclosure filings on 324,237 properties in 2022, and 2023 numbers are on track to surpass this. Foreclosure rates are up 22% in the first quarter of 2023, ATTOM reported.

If you find yourself in preforeclosure, here is what you need to know to prevent it from happening — or at least how to go through foreclosure with the minimal amount of financial damage possible.

Key insights

  • Preforeclosure is a crucial phase that occurs after missed mortgage payments but before a home is officially foreclosed upon.
  • Preforeclosure and foreclosure have severe and long-lasting impacts on your credit and can make it difficult to secure loans in the future or rent a property.
  • During the preforeclosure stage, homeowners can pursue a loan modification, refinancing, repayment plan or a short sale to avoid foreclosure.

Preforeclosure defined

Preforeclosure is the period after you’ve defaulted on your mortgage, but before the lender takes possession of your home. It is the first step in the foreclosure process. 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.

This 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. It's important to note that the specific rules and timelines for preforeclosure can vary based on state laws and the terms of the mortgage agreement.

How do preforeclosures work?

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.

Preforeclosure vs. foreclosure
Preclosure begins when you miss the third payment and receive a notice of default. In preforeclosure, you still own the home and can live in it for the time being. However, once the actual foreclosure proceedings have concluded, you’ll lose all rights to the property.

The length of time you have between preforeclosure and foreclosure varies by state. Some lenders move quickly through the foreclosure process, depending on whether foreclosure is judicial (court hearing and order required) or nonjudicial.

Preforeclosure vs. short sale
Sometimes the terms preforeclosure and short sale are used interchangeably, but they are not the same. A short sale is when the 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.

A short sale is typically used as a measure to avoid foreclosure. 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 . Short sales tend to occur more often in economic downturns.

» MORE: How to lower your monthly mortgage payments

Negative effects of a preforeclosure

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.

You’ll need to act quickly in preforeclosure — foreclosure can happen rapidly if you don’t.

Preforeclosure and foreclosure both have negative impacts on your credit score. While preforeclosure is not a specific entry on your credit report (like foreclosure), the missed payments are noted and can bring your score down significantly.

Foreclosure has more severe penalties to your credit and will stay on your credit report for seven years. During that time, it can be a red flag to any potential lenders if you want to buy again or to landlords if you plan to rent.

» MORE: How to build credit

How to stop foreclosure

Fortunately, preforeclosure doesn’t mean foreclosure is inevitable. You can take some steps to halt the process, like refinancing, opting for a short sale or borrowing money from loved ones.

“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

Some foreclosure alternatives include:

1. Contact HUD for counseling

“You can contact the Department of Housing and Urban Development, as they have a list of housing counseling agencies that can assist you,” McDermut said.

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).

3. Ask about loan modification

Some lenders might agree to modify the terms of the mortgage, making the 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 a reviewer in Connecticut found out, it is important not to take lenders on a verbal word.

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

Robert continued to say that the lender refused to take further payments from him in order to expedite the foreclosure process.

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

4. Opt for a short sale

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.

Note that a short sale will negatively affect your credit, but not necessarily as much as a foreclosure (if there’s no reported deficiency balance). A short sale is a “derogatory item” on your credit report and may stay there for up to seven years.

» MORE: What is a short sale, and should you buy a home through one?


Can I still sell my home during the preforeclosure period?

Yes, you can still sell your home during the preforeclosure period — it might be the best option to avoid foreclosure. 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.

What happens if I can't bring my mortgage payments up to date during preforeclosure?

If you are unable to catch up on your payments, your lender may pursue foreclosure. Seek out every source of help possible before foreclosure, even if it means selling the home through a short sale. It is a good idea to seek legal advice or consult with a foreclosure specialist who can guide you through the process and possible alternatives.

Can I rent out my home during the preforeclosure period?

In most cases, you can still rent out your home during the preforeclosure period as long as you comply with local laws and the terms of your mortgage agreement. Review your mortgage contract carefully, as some lenders may have specific restrictions on renting out the property while it is in preforeclosure.

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    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 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.

    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. ATTOM, " U.S. Foreclosure Activity Doubles Annually But Still Below Pre-Pandemic Levels ." Accessed May 12, 2023.
    2. ATTOM, " U.S. Foreclosure Activity Continues To Climb In Q1 2023 ." Accessed May 12, 2023.
    3. Cornell Law School Legal Information Institute, “ Notice of default .” Accessed May 12, 2023.
    4. Consumer Financial Protection Bureau, “ What is a short sale? ” Accessed May 12, 2023.
    5. USAGov, “ Avoid foreclosure .” Accessed May 12, 2023.
    6. U.S. Department of Housing and Urban Development, “ Foreclosure Avoidance Counseling .” Accessed May 12, 2023.
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