Differences Between Pre-foreclosure And Foreclosure

What is the difference between pre-foreclosure and foreclosure? Pre-foreclosure occurs when a homeowner falls behind on mortgage payments and the lender threatens to repossess the home. Foreclosure occurs when the lender sells the home at auction or forecloses through the courts.

Both pre-foreclosure and foreclosure can be stressful for homeowners. In both cases, it is essential to understand your rights and options. If you are facing either situation, you may consider speaking with an attorney.

What is pre-foreclosure?

Pre-foreclosure is the beginning of the process that leads to foreclosure. If you’ve missed mortgage payments but haven’t yet gone through foreclosure proceedings, you’re in pre-foreclosure. You might still be able to avoid losing your home if you act quickly.

A pre-foreclosure sale is one method that, like a short sale, an assumption, or deed-in-lieu, can prevent homeowners from facing foreclosure. However, it should be noted that this option still leads to the loss of home ownership.

What is a short sale?

A short sale is when the lender agrees to take less than they are owed and absolves the lien.  This requires a third-party purchaser to buy the property. Since the lender is accepting less than the actual mortgage balance, the difference is considered forgiven debt by the IRS and results in a taxable event that you will be required to pay income taxes on.

What is an assumption?

When the lender permits a qualified applicant to assume the mortgage, and release the borrower from the mortgage obligations, this is referred to as an assumption.

What is a deed-in-lieu?

A deed in lieu is another way to prevent a foreclosure, in which upon the agreement of the lender and the borrower, the lender accepts a return of the title as payment for the debt.


What is a loan modification?


A loan modification is when the borrower asks the lender at least 30 days before the scheduled foreclosure sale date to modify the terms of the mortgage to make the borrower current and to also make the payment more affordable.  The borrower will be required to submit an application with supporting documents showing they can afford a modified payment, and the lender will have to provide final approval. 

How does the pre-foreclosure process work?

If you stop making your mortgage payments, your lender might file a notice of default on your property. This is called pre-foreclosure.

The notice of default warns the borrower that the lender is calling the entire balance of the mortgage note due immediately and plans to take back the property if the borrower does not catch up on missed payments.


How does a pre-foreclosure happen in Michigan?

To be considered for pre-foreclosure prevention, also known as loss mitigation in Michigan, the borrower must request an application from the Loss Mitigation Dept. of their mortgage servicer.

If the borrower’s financial information shows that they can afford to make their monthly payments, they might be able to find a way for them to stay in their home.

Loss-of-home options must be considered if it appears that the borrower can no longer afford their home. The borrower must explain why they are behind on their payments and provide documentation to support this claim to the Loss Mitigation Department.

What is foreclosure?

Foreclosure is the legal process whereby a person with a mortgage loses their rights to the property they have mortgaged, should they fail to make payment at the specified time or meet other conditions mentioned in their bond or mortgage.

The lender asks the court for permission to sell the property or in Michigan the lender can foreclose on the property by simply advertising the notice of the sale date. The funds obtained from the sale of the property are used to pay off any associated liens in the priority of their recording with the county, including money owed to them.

Not only do foreclosures take a toll on families, but they also have detrimental effects on entire communities. Missed mortgage payments often show up on credit reports and negatively affect borrowers’ abilities to take out short-term loans and even reduce property values for neighboring homes.

What are the disadvantages of foreclosing your house?

Foreclosure can have significant social and emotional consequences for families, who lose their property and are forced to relocate.

It also can result in a black mark on your credit report that will make it difficult to qualify for loans in the future.

The repercussions of foreclosure also linger in surrounding communities. During the default and foreclosure procedure, houses generally deteriorate.

Homes that have been foreclosed upon are often sold at lower prices than other homes in the area, which decreases the value of all properties in the neighborhood.

An increase in the number of homes foreclosing results in a decrease in value for an entire neighborhood. If homes are abandoned during this process, they become prime locations for criminal activity, adding to the negative effects forecasted for the area.

Does pre-foreclosure affect credit score?

There is no special mark on a credit report that indicates that a mortgage is in pre-foreclosure. When the borrower’s mortgage is sold, it has no bearing on their credit scores.

Even though pre-foreclosure is often only initiated after a borrower has missed three mortgage installments in a row, it does happen. This might result in an erosion of the borrower’s credit score.

A single missed loan payment can have a major negative impact on credit scores, and three consecutive missed payments may result in significant damage to credit. This effect is exacerbated if the borrower has previously defaulted on other bills, such as credit card payments or automobile loans.

Does foreclosure affect credit score?

Borrowers who lose their homes to foreclosure or declare bankruptcy may have credit records that are severely damaged, making it more difficult for them to obtain loans in the future.

If you’ve been put in foreclosure as a result of pre-foreclosure, your credit reports will reflect it. Foreclosure has a greater negative influence on your credit scores than missed payments, and it remains on your report for seven years.

Furthermore, these individuals suffer economic damages as a result of the home’s demise.


No matter what stage of foreclosure your property is in, an attorney can help you guarantee that agreements with the lender will cover the loan and allow you to avoid pre-foreclosure or foreclosure altogether.


How to exit a pre-foreclosure scenario?

If you’re a homeowner who is in danger of foreclosure, don’t fret– there may be some hope for you yet. For instance, one way to avoid going into full-fledged foreclosure is by requesting a loan modification from your lender. This process involves negotiating new and more favorable terms on the mortgage agreement that takes into account the borrower’s current situation. If you need to sell your home quickly, you may want to consider a short sale. This is when you sell the home for less money than what is owed on the loan.

What are the advantages of pre-foreclosure?

Pre-foreclosure means that you still have a chance to save your home. You will need to fix the problems that led to this situation. Lenders are more likely to help borrowers when they are still in the pre-foreclosure stage, compared to when borrowers have already started the foreclosure proceedings.

Is buying a home in foreclosure a good real estate investment strategy?

There are many reasons why investing in foreclosure is often a wise real estate investment strategy.  Foreclosures generally have the potential to offer a much higher return on investment than non-foreclosed properties. This is because foreclosures are often sold at a significant discount, allowing investors to buy low and sell high. Additionally, investing in a foreclosure can be an excellent way to create value-added properties; by renovating and repairing a foreclosed property, you can significantly increase its value, leading to handsome profits when you ultimately sell it.