What is a pre-foreclosure?
The term “pre-foreclosure” is used a lot on property websites and in the foreclosure process. So what is a pre-foreclosure? Simply stated, a pre-foreclosure is in the process of being foreclosed by a lender. The foreclosure process has been started but is not completed.
The foreclosure process varies by state. Stakeholders and timelines are unique to the local environment. Generally, when a borrower stops paying their mortgage, the first step is pre-foreclosure. After two or three months of missing mortgage payments, a borrower will generally get a Notice of Default and enter pre-foreclosure. It’s important to note that during pre-foreclosure, the borrower still owns the property that is being foreclosed.
It is very common that during pre-foreclosure, the bank or lender will try to work out an alternative to foreclosure with the borrower. Foreclosures are expensive and bringing a loan current is a much better scenario for both the lender and the borrower. If a work-out isn’t achievable, the property and borrower will progress further into the pre-foreclosure process.
The pre-foreclosure process is also a due diligence timeframe for the lender. The lender will use this timeframe to give notice to the borrower that their property is going to be foreclosed. They will often also order valuation documents such as an appraisal or broker price opinion to determine the current value of the property. Finally, the lender will initiate the legal process of foreclosure. This could be a judicial or a notice foreclosure depending on what the law requires.
Are pre-foreclosure properties vacant?
Pre-foreclosure properties are generally occupied. Since the foreclosure process hasn’t been initiated yet and the borrower still has the legal ability to make the payments current, they still own the property. The borrower still has the right to live at the property while the property is in pre-foreclosure.
Can I purchase a pre-foreclosure property?
Many people ask “can I purchase a pre-foreclosure property”? The answer is “yes” but you’ll need to explore first who owns the property and what terms would be required to buy the property and obtain clear title. To purchase a pre-foreclosure property, you’ll need to buy it from the current owner and likely pay enough to satisfy the current mortgage and any outstanding fees.
Do lenders sell pre-foreclosure properties? No, a lender can not sell a property they do not own. Until a foreclosure is completed, a lender has a lien on the property. If you see a lender offering a pre-foreclosure for sale, they are likely offering their interest in that property. This is called buying a note. If you buy a lenders interest (note), you’d then need to complete the legal foreclosure process as the new lender to take possession of the property. This process is often too costly and risky for an investor or home buyer. Is is often better to wait for the foreclosure to be completed and purchase the property not the note from the lender.
Why watch pre-foreclosure properties?
Pre-foreclosures online give an investor or homebuyer a good idea of properties that will likely soon be available. The timeframe will vary, but many pre-foreclosures end up being foreclosed and offered for sale. You can find pre-foreclosure properties on sites such as foreclosure.com and Zillow.