Your guide to pre-foreclosure

If you're exploring different homebuying options, you may have come across the term "pre-foreclosure." Pre-foreclosure is the period before a home legally goes into foreclosure. But pre-foreclosure can be a bit confusing. First, it helps to establish what foreclosure means.

Foreclosure is when a lender takes steps to sell a home to satisfy a debt after a borrower defaults — or fails to make payments — on their mortgage. Foreclosure doesn’t happen without warning. The lender will typically communicate an impending foreclosure to a borrower, giving the borrower time to make up payments or sell before the lender officially takes over.

What is pre-foreclosure?

Pre-foreclosure is the period when a mortgage and home go from good standing to foreclosed. A home enters pre-foreclosure when the borrower breaches their mortgage terms and the lender communicates the intent to take legal action in the form of foreclosure, starting with a notice of default. 

A notice of default is a notice from the lender to the borrower warning of an impending foreclosure. Typically, a mortgage note restricts lenders from sending a notice of default until a borrower is past due three consecutive payments. This notice includes a warning that if the borrower doesn’t make payments by a certain date, or sell the home to cover the defaulted mortgage, the home may go into foreclosure with the lender taking ownership of the house. A foreclosure reported on a borrower’s credit report may lower their credit score and impacts their ability to obtain mortgage and other types of financing in the future.

Can you buy a house in pre-foreclosure?

A home won’t officially go on the market until the foreclosure process is complete. If the borrower pays their outstanding debt before the home is foreclosed on, they may be able to keep their home.

However, if the borrower can’t settle their debt, they may decide to list their home for sale before the home goes into foreclosure. If a borrower decides to list, the term “pre-foreclosure” typically turns into a “short sale”. This is where you come in. A short sale indicates urgency to sell, which presents an opportunity for you, the buyer, to make an offer below market value and possibly below what the current borrower owes on the property which requires the current lender’s approval.

Note that not all short-sale homes are a result of pre-foreclosure status and short-sale or foreclosed homes might need substantial maintenance.

In summary

Pre-foreclosure precedes foreclosure, a period when a lender communicates the potential to take ownership of a borrower’s home, often because of a mortgage default. To avoid foreclosure, borrowers may list their home as a short sale, which may present an opportunity to purchase a home at a lower price.