What Is Pre-Foreclosure?

What Is Pre-Foreclosure?

Let me explain pre-foreclosure to you directly: it's the starting point of the foreclosure process where your lender sends a notice of default because you've missed mortgage payments, warning that they might take back the property if you don't sort out the debts.

Pre-foreclosure is essentially the first step in a legal process that could end with the lender repossessing your property if you've defaulted on your loan. The lender files this notice because you've gone beyond the allowed missed payments in your contract.

This notice tells you, the borrower, that the lender is starting legal actions toward foreclosure. If you're in this spot, you have options—lenders might even negotiate with you to prevent going full foreclosure.

How Pre-Foreclosure Works

When you take out a mortgage to buy a home, you agree to repay it through monthly payments that cover principal and interest, as per the contract.

Most contracts say you're in default after missing three months in a row, and that's when the lender can start pre-foreclosure. You'll get a notice of default, which becomes public record via court filing.

This kicks off the process, which can last from weeks to over a year depending on your state and court involvement. The lender typically needs a judge's approval for their lien.

In this stage, lenders are often open to negotiating back payments or loan changes to skip the expensive foreclosure costs. If it goes to full foreclosure, they can auction the property.

Tip on Mortgage Discrimination

Remember, discrimination in mortgage lending is illegal. If you suspect it based on race, religion, sex, marital status, public assistance use, national origin, disability, or age, report it to the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).

Short Sales of Pre-Foreclosure Homes

If you're in pre-foreclosure and put your home up for sale, it's often called a short sale. This can be a direct deal between you and a buyer, but the bank usually has to approve it since the sale price might be less than what you owe.

Not every short sale is in pre-foreclosure—some homeowners sell early to avoid it. Buyers can inspect the home, and investors might buy low to flip for profit.

If you list through an agent, buyers go through them, but the bank might bring in their own brokers or attorneys for a price opinion.

Important Resource for Homeowners

If you're facing foreclosure, contact the federal Making Home Affordable Program at 888-995-HOPE (888-995-4673) for help keeping your home or relocating if needed.

Advantages and Disadvantages of Pre-Foreclosure Sales

Selling in pre-foreclosure can benefit everyone: you avoid credit damage from foreclosure, buyers get a deal below market value, and the lender skips foreclosure costs.

But it's not straightforward—you have to follow legal rules and disclosures. Buyers, watch for liens or unpaid taxes that could transfer to you.

If you don't catch up on payments, modify the loan, or sell during this time, the lender gets approval to evict and sell, often at a lower price to avoid holding costs.

COVID-19 Mortgage Relief

During 2020 and 2021, measures protected homeowners hit by the pandemic. The CARES Act, signed March 27, 2020, set a moratorium on evictions and foreclosures for government-backed mortgages until December 31, 2020, extended to July 31, 2021.

It also offered forbearance for qualifying multifamily owners. Approved borrowers could defer payments up to 360 days, avoid fees, stop evictions, and pause pre-foreclosure or ongoing proceedings.

Private lenders were encouraged to modify loans, and low rates in 2021 helped refinancing, though the Federal Reserve raised rates sharply by 2024.

What Does Pre-Foreclosure Mean?

Pre-foreclosure means the lender is acting to recover owed money on your mortgage, serving as a warning that full foreclosure could follow if you don't resolve the debts.

Is My House in Pre-Foreclosure?

You'll know if you receive a notice of default, signaling the risk. If you've missed over three months of payments, it's likely heading there.

What's the Difference Between Foreclosure and Pre-Foreclosure?

Pre-foreclosure starts with the notice after court approval, where you can still negotiate to keep the home by paying debts. Foreclosure happens if the lender gets eviction authority and auctions the property.

The Bottom Line

Pre-foreclosure is a critical phase where the lender might negotiate on your delinquent debt. You have a last chance to fix it by paying up, modifying the loan, or selling before it hits full foreclosure and eviction.