What Is a Pre-Foreclosure? How the Stage Works for Buyers

Pre-foreclosure is the period between a lender formally starting the foreclosure process and the property being sold at a foreclosure auction. During this window the homeowner still owns the home, usually still lives in it, and can still sell it, refinance it or bring the loan current.

A home does not enter pre-foreclosure after one late payment. Servicers send late notices and try to reach the borrower first, and federal mortgage servicing rules generally keep a servicer from making the first foreclosure filing until the borrower is more than 120 days delinquent, with limited exceptions. By the time a filing appears, the owner has typically been behind for several months.

What makes pre-foreclosure visible is the public record. Once a lender records a notice or files a lawsuit, the document can be searched at the county recorder or the court, and data providers such as RealtyTrac collect it. That is why you can find homes in this stage even though most of them are not listed for sale.

For a buyer, the defining feature is that there is no auction and no bank seller yet. Any purchase is a private negotiation with the owner, often under a deadline, and sometimes with a lender whose approval is needed before the deal can close.

The first public step depends on which foreclosure system the state uses and on whether the loan is secured by a mortgage or a deed of trust.

In non-judicial states, where most loans use a deed of trust with a power-of-sale clause, a trustee handles the foreclosure outside of court. In many of these states the process begins when the trustee records a notice of default, which tells the borrower how much is owed and how long they have to cure it. A notice of trustee sale setting the auction date follows later. Some non-judicial states skip the separate default notice and go straight to a notice of sale. See non-judicial foreclosure.

In judicial states, the lender files a foreclosure lawsuit in court. A lis pendens, a recorded notice that a lawsuit affecting the property is pending, is usually filed at the same time. The court must enter a judgment before a sale can be scheduled. See judicial foreclosure.

Some states allow both methods, and the loan documents and state law decide which one the lender uses. When you research a lead, the type of filing tells you which path the case is on and roughly what comes next.

Either way, the filing is the signal that starts the pre-foreclosure clock. It is not proof that the home will be sold. Many filings are resolved, dismissed or rescinded before any auction takes place.

There is no single answer. The length of pre-foreclosure varies widely by state and by case, from a few months in some non-judicial states to well over a year in some judicial states.

Several things affect the timeline:

• State law. Each state sets its own notice periods, publication requirements and waiting periods before a sale.
• Judicial or non-judicial process. Court-supervised foreclosures generally take longer because they move at the pace of the court docket.
• Loss-mitigation reviews. If the owner applies for help such as a loan modification, servicing rules can pause parts of the process while the application is reviewed.
• Mediation programs. Some states and counties require or offer foreclosure mediation, which adds time.
• Bankruptcy. A bankruptcy filing triggers an automatic stay that generally halts the foreclosure until the court allows it to continue.
• Postponements. Sale dates are frequently moved, sometimes more than once.

For a buyer, the practical lesson is that the dates on a notice are not a schedule you can rely on. Confirm the current sale date with the trustee, the court or the lender's attorney before you make plans around it.

A pre-foreclosure filing has several possible outcomes, and only some of them involve a new buyer:

• Reinstatement. The owner pays the past-due amount plus fees and costs, and the loan continues as before. See reinstatement.
• Loan modification or repayment plan. The lender agrees to change the loan terms or spread out the arrears so the owner can keep the home.
• Forbearance. The lender temporarily reduces or pauses payments, often for a hardship that is expected to end. See forbearance.
• Refinance. The owner replaces the loan with a new one, which usually requires equity and adequate credit. See refinance.
• Sale with equity. The owner sells, the loan is paid off at closing and the owner keeps what is left.
• Short sale. The owner owes more than the home will sell for, and the lender agrees to accept less than the full payoff. See short sale.
• Deed in lieu of foreclosure. The owner gives the property to the lender in exchange for ending the foreclosure. See deed in lieu of foreclosure.
• Auction. If nothing else resolves the default, the property goes to a foreclosure sale.

Buyers only have a role in the sale and short-sale outcomes. Keeping that in mind helps you set expectations: many of the leads you find will end with the owner keeping the home, which is often the best result for them.

Distressed properties are sold at three different stages, and each one changes who you deal with and how much risk you carry.

Each stage suits different buyers. Pre-foreclosures can suit patient buyers who can handle uncertainty, auctions suit experienced cash buyers who research carefully, and bank-owned homes are usually the most accessible for first-time buyers.

Buying before the auction has real advantages. You can usually see the inside of the home, ask the owner questions, use a normal purchase contract with an inspection contingency and close through a title company with title insurance. There is also less competition than at an auction or on the open market, because the home is often not listed.

The risks are just as real:

• The deal may not happen. The owner may reinstate, modify the loan, choose another buyer or simply stop responding.
• The numbers may not work. If the owner owes more than the home is worth, the sale can only close as a short sale, which needs lender approval and can take months.
• Other liens. Second mortgages, home equity lines, tax liens, HOA liens and judgments may all need to be paid or negotiated before closing.
• The auction clock keeps running. A contract with the owner does not by itself stop the lender's sale date. See closing before the sale date.
• The owner is under stress. Deals made under pressure can fall apart, and some states regulate contracts with homeowners in foreclosure.

You can search pre-foreclosure listings on RealtyTrac by location, filing type and filing date. Each record is based on a public filing, so treat it as a starting point and confirm the details with the county recorder or the court. Expect most leads to drop off as owners resolve their defaults.

How to find and screen pre-foreclosure properties explains how to verify a filing and narrow a list by equity, timeline and occupancy. From there, approaching distressed homeowners ethically covers the first contact with an owner, and how to buy a pre-foreclosure walks through the purchase itself.