What is a Pre-Foreclosure Home?

Posted on July 22, 2016 | Back to blog

Real EstateReal Estate ScamsSelling a House

It’s one of those words we’d love to go our whole life never having to hear.

Pre-foreclosure.

The name sounds intimidating enough. But what is it, and what does it mean for you? If your home is in pre-foreclosure, is there anything you can do?

What is pre-foreclosure?

Pre-foreclosure is the “red zone” right before a house is foreclosed. The home has a loan in default (at least 90 days with no payment), and the foreclosure process has started, but it is still legally owned by the owner. It is now in imminent danger of being foreclosed.

This is a process that can take anywhere from 3-10 months before the lender can officially foreclose on the property.

If the property is foreclosed, the homeowner will lose control of the home. It then belongs to the lender and can be sold at auction.

What can you do?

Situations can vary, so your best idea is to speak with a Realtor or legal expert to get advice for your specific needs.

But generally speaking, you have likely passed the point of no return. It’s just a matter of time until you lose possession of the home, take a major credit hit and are evicted.

Now is the time to sell.

Pre-foreclosure sales benefit everyone involved. The homeowner can unload the property with a smaller credit hit than a standard foreclosure, the lender benefits when the loan is acquired by a more financially stable buyer, and the buyer can acquire a home for below-market value.

It really is making the best of a bad situation.

Drawbacks

Although these sales typically close quicker than foreclosure sales, the lender’s approval is still necessary. This means it can take longer than a traditional sale.

For buyers, there are drawbacks worth considering. Competition for pre-foreclosure homes is high, and these homes are sold in “as is” condition, which means that substantial repairs and cleaning will likely be necessary.

These homes also may come with liens and unpaid taxes, which the new owner will be responsible for. Title searches can reveal if there are any outstanding liens on the house.

What’s the difference between a pre-foreclosure and a short sale?

A short sale happens when the homeowner owes more on the mortgage than what the house is worth (also referred to as being “upside down” or “underwater” on your home loan). During the sale, the owner then asks the lender to accept a short payoff on the loan.

This can happen whether or not the homeowner has missed payments, and home doesn’t have to be in pre-foreclosure for a short sale to take place.

Short sales, like pre-foreclosure sales, damage the homeowner’s credit, so it should only be considered as a last resort.

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