When you’re facing foreclosure on your home, you’ve likely fallen into some financial hardships that have affected your ability to pay your mortgage payments on time. Foreclosure is when the bank seizes your property in order to sell it with the goal to recoup the balance on your loan.
The good news is, this is not an instant process that happens as soon as you miss a payment or two. Leading up to the actual foreclosure is a lengthy process called pre-foreclosure. During pre-foreclosure, there are many steps the banks are required to follow before seizing your home, and during this process, you can still potentially stop the final foreclosure.
What are the Pre-Foreclosure Steps?
- Defaulting on your payments – the banks will typically reach out to you after your first missed payment, however, after your third missed payment they will send a demand letter stating you have 30 days to pay off all delinquent payments
- Notice of default – after your fourth missed payment, the lender will send a notice of default, which starts the foreclosure process
- Notice of trustee’s sale – this is when the schedule of sale is officially recorded, this process may be quick or drawn out, depending on whether the state you live in a judicial or nonjudicial foreclosure state
- Trustee’s sale – the property goes to auction and is sold to the highest bidder, they take immediate possession of the property
- Real estate owner – if the property doesn’t sell, the lender becomes the official owner of the property
- Eviction – regardless of who takes ownership of the property, the borrowers must leave the property immediately
What To Do If You Find Yourself in Pre-Foreclosure
The first thing you want to do if you’re about to miss a mortgage payment is to contact your lender immediately. Even before you miss your first payment, if you anticipate you’ll have an issue paying it’s best to contact them as soon as possible.
If you have already built a good amount of equity in your home, you might be able to refinance your loan before you ever miss a payment. By refinancing, you can bring down your monthly payment and allow you to continue without missing any payments.
Lenders don’t want to enter the pre-foreclosure process any more than you do. It’s a lengthy, and sometimes expensive process which is not always the best option for the banks either. They want to help you avoid failing. You can ask for a mortgage forbearance which will pause your mortgage payments temporarily. This can help you get back on track with payments if you’ve fallen under temporary financial hardships. You can work with your bank on a repayment plan in order to reinstate your mortgage.
Selling Your Home in Pre-Foreclosure
If you don’t anticipate that you’ll be able to get caught up on payments through a forbearance program, it’s a good idea to consider selling your home. This is ideal if your home is worth more money than you owe on your mortgage. Calculate how much you expect your home may sell for plus any fees you will incur and any taxes or other bills you owe. If you can sell your home for more than what you owe, you might even be able to walk away with some money as well.
If the house is not worth more than you owe, your bank may work with you on a short sale. In a short sale, the bank will accept a buyer paying less than the balance of the mortgage in order to avoid the foreclosure process. You must get your bank’s approval for a short sale.
How Long Does Pre-Foreclosure Last?
The pre-foreclosure process can be extremely long. In Hawaii, the entire process can last more than 3000 days, whereas in Wyoming the average length of time to foreclosure was 173 days. The length of the process mainly comes down to whether you live in a judicial or nonjudicial foreclosure state.
In a judicial state, the bank must prove to the courts that the borrow has defaulted before they are allowed to take possession of the property. The courts must approve the foreclosure and then the bank put the home up for auction. In a nonjudicial state, the lender doesn’t need to go through the courts. Rather, the banks can use power of sale to put the home for auction immediately, assuming the homeowner doesn’t sue them.
Pros of Pre-Foreclosure
Of course, it’s best to avoid the entire pre-foreclosure process, but the upside is that you still have time to resolve the situation. By either working together with the bank or selling your home before they seize it, you can avoid going through the final foreclosure.
The biggest key to take away is to contact your lender as soon as you realize you may miss a payment. Many homeowners are in denial or want to sort out the situation on their own. However, working with the banks before you first missed payment is the best option. You might potentially avoid even starting the pre-foreclosure process as well as negative impacts on your credit score.