|By David Pilley on October 8, 2010
Foreclosure is one of the scariest words out there right now. If you are foreclosed upon, you could be displaced from your home, and if you are raising a family, foreclosure could be a devastating experience. Before going into foreclosure, though, some people may experience something called pre-foreclosure.
Pre-foreclosure is a sort of grace period, in which you have a few months to make up the monthly mortgage payments on which you have defaulted. Simply put, if you can make the payments, you will get out of a possible foreclosure, and you’ll retain your home.
However, if you can’t make the payments, the next step would be a pre-foreclosure sale. Again, not everyone is eligible for pre-foreclosure, so there are some stipulations. If you own other property of value that could be used as collateral, you will just go straight to foreclosure.
When it comes to your home, its value must have dropped since the time you took out the mortgage loan to live in it. Since you are unable to pay your debt, your lender will try to sell your home for a lower price. For a successful pre-foreclosure sale, you will first receive an appraisal (or a measurement of the property’s current value). Your property’s appraisal must be at least 70% of what is still owed on the mortgage to qualify for a pre-foreclosure sale. The house must then sell at no less than 95% of the appraisal value. Your home must then be sold within a specific time period determined by the lender. Your lender certainly does not want to put you on the street immediately, so you’ll get a few months to sell. Finally, when the house is sold, you must be at least two months in default on your mortgage payments. (Always keep in mind that, if you can make up your mortgage payments, do it as soon as possible!)
A pre-foreclosure sale is not as bad as an actual foreclosure. In sports terms, it might be like throwing one interception instead of throwing three. It’s a less distressing negative. A pre-foreclosure sale does less damage to your credit score than a full-blown foreclosure. This means you will be able to purchase a new home in a shorter period of time. This period of time will still encompass a couple of years, so you are still in limbo. Before going into pre-foreclosure (if you are eligible), consider any alternate options, like refinancing the mortgage loan or downsizing to a smaller home.