Difference between Pre-Foreclosure and Foreclosure

Maybe you or a friend or family member is  behind on their mortgage and are trying to figure out what it all means. Know it’s overwhelming. It’s confusing. And that help is available. 

So let’s answer the question about what the difference is between Pre-Foreclosure and Foreclosure. And as a bonus, let’s also talk about what REO stands for and means. 

Okay, let’s say that I am not able to afford the mortgage on my house. Most people believe that if you miss the mortgage payment on the 1st of the month then you are late. This is not true. You have a grace period until the 15th of every month. You are late on the 16th, but it's kind of late. Yes, It’s true. You are late and you will be assessed a late fee, but there will be no impact to your credit as long as you pay by the end of the month. That’s why I say it's kind of late. The late fee is annoying, but your credit isn’t harmed so in the grand scheme of things… Who cares? The mistake cost you a couple bucks. 

Okay, once you are a month late, that’s when you have moved over to the pre-foreclosure pool of loans. This is essentially when the bank will most likely move the loan to the loss mitigation department. Most. I say most because all banks don’t operate the same. But, most banks won’t really do anything for the first 90 days. They may call to try to get some money. Send a couple automatically generated notices outlining a borrower's options. But they don’t really take it all that seriously at this time. They are hoping the homeowner cures the loan. 

It’s after 90 days, that’s when banks start to move forward and take it a little more seriously to begin the actions of settling the debt. Now for some banks it might be 120 days. But even then, the timeline may not necessarily be set in stone. Some banks may take even a little longer if they had a surge of loans that were sent to the loss mitigation department and are ultimately working through a backlog. This entire process. This entire time is what is known as pre-foreclosure. 

Once the loan is transferred to the foreclosure department and the actual foreclosure process is started, that’s when a homeowner is in foreclosure. So what is foreclosure? It’s the legal process through which a lender takes ownership of a property. The lender initiates foreclosure proceedings to recover the outstanding balance of the loan by selling the property through a public auction. So the loan being transferred to the foreclosure department and then initiating the foreclosure proceeding is when a borrower is now in foreclosure. 

And you know when you are in foreclosure. The bank tells you. The frequency of calls and letters greatly increases. You will still get your normal loan statement each month, but you will get much more. 

Now a quick sidenote. Don’t hide from the lender. If they call. Pickup the phone. Let them know that you are still living in the house and that you are not able to make the payment in full. A bank will prioritize a property that they have deemed is vacant in order to protect the asset. 

How long is the actual foreclosure process you ask? Depends on the state. Depends on the situation. Some states are quicker than others. But know that once a foreclosure date has been set… You are now officially playing with a little fire. The time is coming and it’s coming quickly.  

The property will go to auction. Now if possible, a bank will generally happily let a property sell at the auction provided that the balance that is owed is cleared. Who is at these auctions? Investors looking to get a deal on the property. They buy them site unseen. 

So let’s say I had an outstanding balance of $300,000 and that included all my late fees and attorney fees. The bank will generally open the bid at $300,000. If an investor steps in at an amount over that $300,000 then the bank happily walks away. But if there are no investors. In other words, if an investor doesn’t feel the property is worth the $300,000, then the bank will end up buying the property at the auction. 

This is when it becomes an REO or Real Estate Owned. Most people confuse the REO term with Foreclosure. They will say, I want to buy a Foreclosure. This is technically incorrect. They really want to buy an REO. Because as we just discussed, a foreclosure is the process. Now technically them saying that they wanted to buy a foreclosed property would be correct, but we have really started splitting some hairs here. 

The important thing is to know that there is a difference between the two. A big difference. As it shows where you are in the process and how much time you have left. The more time that you have left, then the more options you have. 

Options like modifications, selling the house traditionally to maximize the sales price and thereby the proceeds where the balance goes back to the homeowner. But as you get closer and closer to the closing, then the amount of options starts to drastically decrease. We can generally close on a home within 14 days, but let’s hope there are no title issues and that everything goes smoothly. We can a lot of times get a foreclosure date pushed off with a signed offer, but there are no promises. 

Some states have redemption periods where a homeowner can buy back the house. Others do not. This is a complicated process which is why if you are in it, then you should reach out to someone. 

I am here to help in any way I can. Again, my name is Jeffrey Chubb and my phone number is 617-775-7687 and my email address is [email protected]

Until next time. 

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