As most people know, when homeowners fall behind on their mortgage, the bank can choose to foreclose. However, the law requires the bank to provide notice to the borrower informing them they are in default.
In legal terms, this means the home is in pre-foreclosure. During this period, the homeowner still has time to salvage their mortgage and make arrangements to get their payments back on track.
Today, we look at what happens in pre-foreclosure, the solutions available to homeowners, and when a property actually is in foreclosure.
Legal vs Real Estate Terms
The legal term “pre-foreclosure” means that the borrower has been notified that their mortgage is in default. At this stage, the homeowner can avoid foreclosure by curing the default. For people who are in brokerage or online real estate businesses, the term means that there has not been a judicial sale so that the property is now owned by the bank. In other words, for real estate people “pre-foreclosure” means that it is before the foreclosure has completed. For a lawyer it means that the Complaint for Foreclosure has not yet been filed.
The Foreclosure Process
If the owner fails to cure the default and catch up with their payments, the foreclosure will proceed pursuant to the statutory requirements of filing suit, serving the homeowner, proceeding in Court, getting a judgment, going to judicial sale, recording the deed, and removing the homeowners or tenants from the property. This is “in foreclosure.” The bank needs to sell the property and will evict the owners, clean up the property, and put it on the market. This may offer opportunities for buyers to find a good deal on a home. But that will only happen after the bank or a private investor takes title through a judicial sale.
The Broker’s Opportunity
Foreclosed homes present a major opportunity when inventories are low. That’s one of the reasons brokers and agents keep an eye on properties subject to foreclosures, because they will be better positioned to make offers for their clients before a foreclosure case concludes. Of course, there are two possible opportunities in these cases.
The first is that the bank forecloses, and the house goes on the market. The second is, the homeowner knowing they could have a foreclosure judgment entered against them, lists the home themselves. Both scenarios work well for agents because both mean the sale is urgent. It is usually an “as is” sale and there is less haggling.
The Homeowner’s Options
In pre-foreclosure, the homeowner still has options.
They can choose to list the property as mentioned above, which might allow them to repair their credit and walk away with some money from the sale. They can also try to refinance, borrow money from their 401k, friends, family, or in high-interest scenarios.
It is always best to seek good legal counsel for a homeowner to know their options. Very often the attorney can help the broker help the homeowner make decisions. Other options may include:
- Loan modifications
- Repayment plans
- Discounted payoffs
Lawyers offer homeowner solutions at this critical time when the house is still theirs, and they have time to make arrangements to save their home. These options may help make the mortgage payments more manageable. The bank generally prefers to have their money than go through a costly foreclosure process.
While real estate people and lawyers have different terms for the process, a default on a mortgage demands good counsel and sound solutions.