What is pre-foreclosure? It is the first legal leap that can end up in the property being reclaimed from a defaulted borrower. The reclaim happens when the lender, who also plays the role of a seller, files a default notice during pre-foreclosure. The legal notice is filed because the buyer fails to complete transactional payments on time for the property and exceeds the terms laid out in the initial contract. Borrowers receive a legal notice stating that lenders will take legal steps to foreclose the mortgaged property.
Following the legal notice, there are a few alternate options borrowers can choose to get themselves out of this situation. If you take the right steps, there’s even a chance that the lender will reconsider your offer. In the worst-case scenario, lenders will issue an eviction notice to evacuate the premises. Now that you know what pre-foreclosure means, let’s move on to some other important notions on this topic.
There are six key steps or phases that follow pre-foreclosure. Getting out of pre-closure can sometimes be easy if you follow the right steps. The foreclosure process differs in every state, but generally speaking, there are six major phases that you should be aware of.
A default in the mortgage amount occurs when the buyer or borrower misses out on paying at least one payment. The definition of defaulting can vary from state to state. When the buyer misses out on paying the said amount, the lender will contact the buyer by phone or send a legal notice.
In most cases, borrowers must pay the mortgage on the first of each month. The dates may vary in each case, but the one-month interval remains the same. If for some reason, the buyer fails to make the said payment by that date, a grace period can be allotted by the lender. If the borrower fails to make the payments within three months, the lender sends a demand letter to accelerate the process.
This process has three main outcomes:
A NOD, known as the default of notice, is sent after 90 days if you keep missing payments. The notice usually arrives in the fourth month. It is a public notice given to the borrower to clear all payments before the foreclosure process can formally start.
Most lenders do not send in a NOD before three months. This allows the borrower to fall behind in payments for a month or two without getting a notice.
Every state in the U.S. has a different process for foreclosure. Most states only require filling in the documentation and approaching the relevant court to initiate the process for foreclosure. That gives a quick head start to the process. Other states require the court’s approval at every step, which makes the overall process longer.
Following this, when all the relevant forms are filled with the court’s approval, the lender or trustee will put the property on sale. The notice of sale records all the relevant information and puts the minimum bidding price for the said property.
It is also the step where the property gets highlighted through ads, signs, newspapers, and more, making it easier to make the property known to the greater public before the auction. The time between the issuance of the notice of demand and property auction varies in every U.S. state. This time can be as short as 2-3 months or longer. However, if the borrower succeeds in arranging the missed payments before the auction, they can still retain the property.
The fourth phase is where the property is put out on the market and becomes open to auctioning. Bidders place their prices on the property, and the highest bid gets the property. The lender’s side calculates the total cost for the opening bid and decides the total value by adding all the unpaid loans, taxes, and other associated costs.
The sale is completed once the property is allotted to the highest bidder. The trustee’s deed is granted to the winning bid. Subsequently, the property is now in the ownership of the new purchaser, who can take immediate possession.
REO, better known as Real Estate Owned, is the fifth phase for pre-foreclosure in which the lender quotes the minimum amount for a mid. This amount also takes the value of the appraisal, the remaining mortgage or loan amount, and any attorney fee included.
If for some reason, the property does not get sold during the auction period, the lender will try to sell the property through a broker or an REO manager. These properties are then regarded as “bank-owned.” The lender can also lower the value to make the property sale more attractive.
The final stage is eviction which follows soon after the auction. As soon as a new owner is named at the auction or during the bank’s own time (in case the property is not sold during the auction), the borrowers are notified to vacate the premises if they still reside on the said property.
The court or lenders may provide sufficient time to allow the borrowers to vacate the property and take their personal belongings.
Pre-foreclosure happens on a property when a NOD is issued after getting approval from the state’s court. This phase is when negotiation can easily occur between the lender and borrower, and any collateral damage can be managed by paying the debt amount.
On the other hand, a foreclosure takes place when the lender has the authority, without the court’s interference, to issue a foreclosure notice of eviction to the borrower and sell the property through auction.
See also: How to sell a House without a Realtor?
Lenders can sell a mortgaged house during the phase of pre-foreclosure. This scenario is a win-win for both the sides involved. The sale of the property can save the homeowner from any damage that foreclosure involves regarding their credit history. The lending party does not need to pay the cost of foreclosure or put it out for auction.
Selling the property without assistance is generally difficult as lenders must consider many factors. There can be unpaid taxes on the home that can be transferred to the new homeowner without proper disclosure or documentation.
The lender is granted the property authorization when the borrower fails to make the mortgage amounts on time. At this stage, the homeowner can evacuate the borrowers and try to sell the property at low prices to attract more people.
If everything goes by the book, the homeowner can save himself from bankruptcy and even afford to buy a home afterward at an affordable rate.
However, the downsides to selling the property are there as well. Selling during the pre-foreclosure phase is not an easy task. Moreover, if any of the one-time payments are missed, the property can go into foreclosure. This entire situation can be emotionally draining as well.
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