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What is Pre-Foreclosure, and How Does It Impact Both Homeowners and Homebuyers?

Pre-foreclosure doesn't have to be scary. Learn what it is and how it impacts both buyers and sellers in real estate.

[Updated: Mar 02, 2021 ] Apr 05, 2020 by Liz Brumer
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Whether you've received a notice of pre-foreclosure from your lender or found a home for sale that is in pre-foreclosure, it may lead you to wonder, What is pre-foreclosure, and how does it impact you as a homeowner or a homebuyer?

Learn what pre-foreclosure means, how long it can last, the pros and cons of purchasing a home in pre-foreclosure, and the process of selling or buying a home that is in pre-foreclosure.

What does "pre-foreclosure" mean?

Pre-foreclosure means a property is in the beginning stages of a foreclosure action which is the legal process a lender can pursue if the homeowner is delinquent on the mortgage.

If a home is labeled as pre-foreclosure, the borrower is 60 to 90 days or more past due on their mortgage payments and has received a default notice, or "lis pendens," from their lender. The loan and property now fall in some stage of the foreclosure process before the property is formally foreclosed on and sold at a public auction or sheriff's sale or is repossessed by the bank.

How long can pre-foreclosure last?

How long pre-foreclosure lasts depends on where the real estate is located because the foreclosure process and length of foreclosure varies by state. The foreclosure process in a judicial state can take several months to possibly several years to complete because the foreclosure must go through the court or judicial system, being heard before a judge.

Nonjudicial foreclosure states are typically much faster and can take as little as several weeks to several months to complete the process before properties are foreclosed.

If a homeowner wants to avoid foreclosure they can request a reinstatement amount from their lender, which will include any past due mortgage payments with fees or penalties and will be good for 30 days. If paid in that time, the mortgage is brought current, the foreclosure is stopped, and the borrower is expected to make the mortgage payments as normal moving forward.

An additional option is to request loss mitigation from the lender, which is an alternative option to foreclosure, like receiving a forbearance plan or loan modification. However, the lender or servicer is not required to offer or approve loss mitigation, so while it's almost always a good idea to ask, it may not be a viable option to avoid foreclosure.

It's not uncommon to see homes or properties for sale when they are in the pre-foreclosure process. If the homeowner owes more than the property is worth, it would be listed as a short sale. However, if there is equity, the property owner can list the home for sale with a real estate agent or sell it to a real estate investor in order to pull out any equity and pay off the mortgage balance before the home is foreclosed.

What are the pros and cons of purchasing a house in pre-foreclosure?

Purchasing homes in pre-foreclosure is especially popular in real estate investing because there is a greater chance of buying the property at a discount because the property owner is in distress. The homeowner is on a time crunch, trying to sell the property before the foreclosure sale, and thus is more likely to accept a discount in order to do so.

One downside to buying homes in pre-foreclosure is getting the bank or lender to cooperate in paying off the loan in full or approving a sale amount if the property is a short sale. Big banks are notorious for taking a long time to respond to inquiries, which can delay the sale process by weeks or sometimes months.

How do you purchase a house that is in pre-foreclosure?

If you are interested in purchasing a house in pre-foreclosure, first identify what properties are in pre-foreclosure and then get in touch with the homeowner to determine whether they actually want to sell. Just because a real estate website states a home is in pre-foreclosure does not mean the homeowner wants to sell.

You can find out what properties are in pre-foreclosure by purchasing a list from a large data company, searching your county's public records, or looking for listings in the multiple listing service (MLS), or with your real estate agent.

Most real estate investors market to pre-foreclosure leads using a direct mail campaign in order to get the homeowner to contact them about the possible sale of their home. However, if you find a property online that is actually listed for sale, you can engage in negotiations directly with the owner or make an offer through a buyer's agent if desired.

Once a purchase price is agreed upon, you'll enter into a contract and move forward with a closing like normal. The only difference may be if the property is a short sale, in which case you may have the additional step of having the bank or lender approve the sale price and what they are willing to accept as a short payoff of the loan.

If you are in pre-foreclosure or have found a pre-foreclosure property you are interested in, explore your options or begin the initial steps of contacting the property owner to determine their motivation or desire to sell. Just remember, while some pre-foreclosure properties can be purchased at a great price, not every borrower in pre-foreclosure will want to sell or will need to sell at a discount.

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