Pre-Foreclosure

Pre-foreclosure is the first stage of a legal proceeding that can end in a property being taken from a defaulted borrower. Pre-foreclosure is when the lender files a Notice of default on the property to notify the borrower that the terms for late payments have been exceeded. The notice of default informs the borrower that the lender is taking legal action to foreclose. If a borrower finds themselves in preforeclosure, there are a few options. Sometimes, lenders will even negotiate with borrowers to prevent them from moving into foreclosure.

How Pre-Foreclosure Works

 

A contract is signed by a home buyer when they take out a loan to buy a property. They agree to repay the mortgage loan in accordance with a contractual agreement. Typically, the monthly installments are made. The monthly payments are typically structured to cover a portion of the principal or interest on the mortgage.


Standard mortgage contracts are usually in default when a borrower is unable to pay for three consecutive months. Usually, pre-foreclosure is authorized by the lender at that point.


A copy of the notice of default is sent to the borrower. This information is made public by filing with a court. This is the beginning of the pre-foreclosure procedure, which can take up to a year and vary by state.

A foreclosure proceeding follows several steps. Pre-foreclosure is initiated when the notice of default is issued. The lien of the lender has to be approved by a judge.


Lenders will often be more open to negotiating backdated payment and loan modifications in order to avoid costly foreclosure proceedings. After a foreclosure is granted, the lender can proceed to a public trustee auction.

 

Pre-Foreclosure Pros & Cons

 

Pre-foreclosure can be used to sell a home. This can work out in the best interest of all parties. The homeowner can sell their home to avoid the credit damage that foreclosure could cause. The property can often be purchased for less than market value. The lender doesn't have the obligation to pay for a foreclosure proceeding or to sell the property.

Selling a property on your own is difficult, especially as there are many legalities and disclosure requirements that the seller must follow. Pre-foreclosed properties must be made aware of any tax liens and unpaid taxes. These could be transferred to the new owners without proper documentation or disclosure.

The lender can grant authorization to the lien and can then evict the owner. At this point, the bank is the owner of the property and will likely try to sell it at a lower price than its ongoing expenses like taxes and insurance.

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