What is the Difference Between Pre-foreclosure and Foreclosure?

To understand the difference between foreclosure and pre-foreclosure clearly, you must become familiar with the basics first. Foreclosure is when you buy a house and you fail to pay your mortgage payments on time. After a certain length of time, your house will go into foreclosure and will be auctioned off by the lender to the highest bidder.

Before a borrower buys a house, they have to take out a mortgage or a home loan. Banks and other mortgage lending institutions extend home loans to borrowers, after scrutinizing the borrower’s financial status, income potential, credit history and the repaying capacity of the home loan. A legal contract (mortgage deed) is made out between the mortgage lender and the borrower before the money on the loan is handled.

The legal contract contains all the terms and the conditions of the repayment of the home loan. Generally, home loans are offered from 15 to 30 years during the repayment period with principal and interest specified to be repaid through monthly repayment installments. The mortgage lender has to pay back the interest on this home loan within this time frame. As a safeguard, the lender reserves the right to seize and sell the said housing property, if the repayment on the home loan defaults. Eventually the lender forecloses the mortgage loan, confiscates the aforementioned property and sells it off at a public auction. This is called the foreclosure process.

The foreclosure process is under the control of the different foreclosures laws that are in every state. The foreclosure process varies under the two main types of foreclosure: judicial foreclosure and non-judicial foreclosures. In the judicial foreclosure process, the lender has to file a lawsuit against the borrower before a court in order to obtain a mandate from the court to auction off the property.

Foreclosure law stipulates the procedures for issuing a default notice by the lender to the borrower. In this procedure, a sufficient amount of time must be granted to the borrower to respond to the notice, a trial must be conducted before the court to prove there were financial transactions made on the home loan and there was a default made by the borrower through documentary evidence and finally fixing up a date for the public auction of the property. This is a long and drawn out process that will take up much of your time. This all part of the pre-foreclosure process.

The non-judicial foreclosure process is simple and fast because it only requires a clause to be inserted into the mortgage deed allowing the lender to speed up the process of seizing and selling off the property. A third party sale known as the “trustee sale” of the property is also known as the public auction where the property is sold of to the highest bidder. But the “trustee” conducting the sale will be an individual or a financial institution already specified in the mortgage deed. Default notices are registered at the County’s Recorder Office in the county where the property resides.

The entire foreclosure process takes place in three stages. The first stage is called the pre-foreclosure period, which is the time from the first notice of default and the actual day of the public auction. The second stage is the actual foreclosure of the property through public auction. The third stage is called post-foreclosure, which occurs only when the property is not auctioned off and the lender has to repossess the property.

From the angle of a homebuyer, purchasing a foreclosed home from one of the foreclosure property listings can save them a ton of money. Of all the three stages, pre-foreclosure offers a great opportunity to bargain a good price directly with the distressed homeowner. Until the property is sold off at a public auction, the homeowner owns the property. Distressed homeowners are usually willing to sell their about to be foreclosed homes at a discount so that they won’t end up with a foreclosure on their credit report.