Pre foreclosure occurs when borrowers default on mortgage payments. Banks can commence with foreclosure action once payments are delinquent by 31 days, but most wait until payments are two or three months past due before taking legal action.
During the pre foreclosure stage, borrowers can stop foreclosure if they can cure mortgage arrears and remain current with future payments. If borrowers are unable to become current with payments they might be able to engage in foreclosure prevention strategies such as deferred payments, forbearance agreement, or loan modification.
Foreclosure prevention is handled by each lender’s loss mitigation department. This special office handles a variety of duties including foreclosure prevention, real estate short sales, deed in lieu of foreclosure, mortgage refinance, and foreclosure.
Loss mitigators are often overworked and unable to manage all delinquent accounts. Therefore, borrowers must be proactive in their attempts to communicate with their lender. If they are unsuccessful in working out a plan over the phone, they may need to send a certified letter to document their request.
It is important to contact bank loss mitigation the moment financial hardship occurs which prevents payment of loan installments. Banks do not want to repossess real estate unless no other option exists. The cost of the foreclosure process is expensive and results in a financial loss to the lender.
The most common pre foreclosure option offered by banks is real estate forbearance agreements. Forbearance plans temporarily reduce or suspend mortgage payments. The downside of this option is borrowers must be prepared to pay missed payments in full when the contract ends.
Forbearance plans can also place borrowers at risk for not having sufficient funds in escrow to cover mortgage insurance and property taxes. If these bills become due during the forbearance agreement, borrowers are required to pay taxes and insurance out-of-pocket. If they cannot afford these expenses, banks can initiate foreclosure action and void the forbearance contract.
Deferred payments are sometimes offered to borrowers facing temporary financial setbacks. Banks generally defer two or three months of payments by rolling them to the end of the loan. Borrowers will be subjected to additional interest charges, but this option can be a good choice for those who can remain current with future payments.
Loan modifications temporarily alter the terms of the mortgage note and can suspend or reduce principal payments or interest rates. Loan modifications can be a good choice for borrowers who have recovered from financial setbacks, but require time to catch-up with past due payments.
When mortgagors experience financial hardship due to long-term unemployment or serious illness, they might qualify for a partial claim offered through the Department of Housing and Urban Development. When banks submit a partial claim, HUD pays the banks the required funds to bring the note current.
In order to qualify for a HUD partial claim, borrowers must be a minimum of four months delinquent, but no more than twelve months behind on their loan. Mortgagors are required to sign a promissory note and a lien is placed against the property until the partial claim is repaid.
HUD also offers the Pre Foreclosure Sale Program (PFS) which allows mortgagors to sell their property and use profits to satisfy the balance owed on the loan. Borrowers can review PFS criteria, along with other foreclosure prevention programs at HUD.gov.
Borrowers should also discuss the short sale option with their lender. Short selling means banks agree to accept less than the balance due on the mortgage note. Borrowers are only allowed to enter into real estate short sales while their home is in pre foreclosure. Once the property enters into the foreclosure phase it becomes ineligible for short sale programs.
HUD – Partial Claim
HUD – Pre Foreclosure Sale Program