How Does Pre-Foreclosure Work?
Real estate property owners in Massachusetts sometimes rely on lenders to finance property purchases. Others also use existing landed properties as security when applying for loans. In both instances, the borrower signs an agreement allowing the lender to sell the property if the borrower defaults, or fails to make necessary payments on time. Yet, the lender must follow specific steps before taking the mortgaged property from the borrower, a process referred to as “foreclosure.” One such step is called “pre-foreclosure.”
Learn more about the pre-foreclosure process and gain some tips on how to stop pre-foreclosure.
What Is Pre-Foreclosure?
Pre-foreclosure is a stage before foreclosure officially starts when the lender files a notice of default. When the borrower misses several mortgage payments, the lender typically notifies them about the default and indicates that they may take further action to recover their money.
The mortgage agreement usually contains details about the loan repayment structure and deadlines, which can vary depending on the contract. But in most cases, the borrower defaults after missing three to six months’ payment. Federal and state laws protect the borrower, meaning the lender can only sell the property after complying with specific guidelines.
Massachusetts is a non-judicial foreclosure state, meaning the foreclosure happens outside of the court system, although judicial foreclosures are still permitted. Also, in the non-judicial foreclosure proceedings, the court still plays a role. These foreclosures are faster and cheaper for lenders than those that go through the court system.
The Pre-Foreclosure Process
Here is how pre-foreclosure works in Massachusetts:
1. Mortgage Default
Pre-foreclosure can only begin when the borrower breaches their repayment obligations under the mortgage agreement. The terms of the contract determine the repayment structure, but in most cases, the borrower defaults when they miss at least three months’ payments. After that, the lender may begin taking steps to recover the money owed by the borrower.
2. Notice of Default
The lender issues a notice of default to the borrower stating that they have fallen behind on mortgage payments. The notice also informs the borrower about the lender’s intention to proceed with the foreclosure process if the borrower continues to breach the mortgage agreement by missing payments. Generally, the notice of default will provide information about how the borrower can avoid foreclosure. The lender must personally deliver or mail the notice of default to the borrower.
The notice of default is a warning, meaning the borrower continues to live on the property. Federal law generally requires the lender to wait 120 days before officially commencing foreclosure. However, the lender may begin the process earlier in some cases, like when:
- The borrower violates a due-on-sale clause.
- The servicer is joining the foreclosure action of a superior or subordinate lienholder.
A servicer is the company that manages your mortgage payment after you default.
Borrowers who mortgage their dwelling homes with four or fewer units in Massachusetts have 90 days to cure the default once during any five years.
How Long Is the Pre-Foreclosure Process?
The duration for pre-foreclosure may vary depending on the facts. However, the lender needs to follow the timelines that the law provides to ensure a valid foreclosure. Borrowers must also strive to find solutions before the statutory periods elapse. In Massachusetts, lenders hold the title to the property, so the foreclosure process can proceed in a shorter time frame.
How to Stop a Pre-Foreclosure
Here are five tips on how to get out of pre-foreclosure:
1. Challenge the Pre-Foreclosure
Massachusetts law requires lenders to comply with strict laws when foreclosing a property. However, there are instances where lenders make mistakes. For example, lenders may send premature default notices, although you have fulfilled your repayment obligations. Lenders may also fail to send the necessary notices when you miss monthly payments.
Depending on the facts of the case, borrowers can prompt lenders of the error and get the pre-foreclosure stopped or at least paused. It’s advisable to consult an attorney if you face such a challenge to protect yourself and your assets.
2. Restructure the Loan
Loan restructuring or modification is a common way to save your property from foreclosure. Borrowers struggling with mortgage payments can negotiate the terms with the lender. It’s best to communicate with the lender during such challenging times, especially after the first missed payment, to explain why you cannot perform as agreed.
You may persuade the lender to extend the loan duration, reduce your monthly payment or offer forbearance, which stops your payment temporarily. You may also negotiate for a lower interest rate. Lenders may be willing to work with you to find a practical solution since foreclosure proceedings can be tedious and expensive.
3. Refinance the Loan
Loan refinancing occurs when you pay off an existing loan with the proceeds of a new loan. You can acquire the loan from the same lender or apply to a different lender. This option is simpler when you:
- Have decent credit
- Still earn income
- Have some equity in your home.
Other factors that may influence refinancing opportunities are your mortgage status and type of loan.
Some borrowers prefer applying to their current lenders since their payment history could discourage new lenders. Additionally, since existing lenders understand the borrower’s finances, they may have options that streamline the process. However, it’s still important to prepare adequately before contacting the lender to increase your chances of success.
Loan refinancing can lead to new closing costs, but it’s preferable for those looking to lower their monthly payments. An unexpected financial situation or income change will generally prompt lenders to reduce the monthly payments.
4. Consider Short Sale
A short sale is when you sell your home at a price lower than the mortgage value. Unlike a standard sale, short sales involve the lender in the transaction. Also, the homeowner often requires the lender’s approval to accept the bid.
Although the property might be sold for less than the mortgage value, the lender considers the debt fully paid. A short sale can affect your credit score but sometimes not as much as foreclosure.
5. Sell to Cash Buyer
Selling your house to a third party can get you out of pre-foreclosure. You can find a reputable company that buys houses for cash and is willing to offer you a fair value, at least the amount you owe. This allows you to satisfy your lender without harming your credit.
Unlike a short sale, this option gives you control over the sale price and is more flexible. Selling your home for cash also lets you retain some equity you may have built in your home.
Differences Between Residential and Commercial Foreclosures
Residential and commercial foreclosure processes are similar for the most part, but there are some differences. For example, residential borrowers have added protection under the consumer protection laws, such as the Massachusetts Predatory Home Loan Practices Act and Massachusetts Consumer Protection Act.
Again, residential borrowers usually have more extensive avenues to cure the default than commercial borrowers. In most cases, lenders try to avoid foreclosure involving residential property.
Contact Calabrese Law Associates for Commercial Foreclosure Assistance
Calabrese Law Associates is an experienced real estate and mortgage law firm that provides effective and practical solutions to clients in the Greater Boston area and throughout Massachusetts. Our attorneys will dedicate time and attention to assess your case and provide tailored solutions. The ultimate goal is to help you find answers to your legal questions. Contact us now to learn more!
This publication and its contents are not to be construed as legal advice nor a recommendation to you as to how to proceed. Please consult with a local licensed attorney directly before taking any action that could have legal consequences. This publication and its content do not create an attorney-client relationship and are being provided for general informational purposes only.
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