What Is a Preforeclosure Sale?

A preforeclosure sale is a type of real estate sale that makes it possible for the owner to offer the property for sale prior to the actual foreclosure action. The approval for the sale typically includes the provision that the owner who is about to default on the property use the proceeds from the sale to settle as much of the outstanding mortgage debt as possible. In the event that the preforeclosure sale does not generate enough revenue to settle the entire debt, the owner is still considered liable for the difference.

One of the main benefits of the preforeclosure sale approach is that it helps to prevent the defaulted loan from going into foreclosure. Assuming that the sale is successful and the owner is able to sell the property for at least enough to satisfy the balance remaining on the mortgage, the end result is less damage to the debtor’s credit rating. In the best of situations, the owner is able to sell the property for more than the remaining balance, pay off the mortgage, and use the remainder of the proceeds to regain some degree of financial stability.

While laws and regulations vary from one jurisdiction to another, a preforeclosure sale can usually not take place until after the loan is in default. Once that has occurred, the lender and the owner can work together to arrange for the sale and hopefully bring the arrangement to a mutually beneficial resolution. In some instances, the owner will be the recipient of the proceeds from the sale. More commonly, the lender receives the proceeds from the preforeclosure sale, keeps the amount needed to settle the loan balance and any other allowed expenses connected with the default, and forwards the remainder to the former homeowner.

It is important to note that the use of a preforeclosure sale to avoid foreclosure does not mean that the debtor will not experience some damage to his or her credit rating. Since the loan must be in default before the sale can take place, this means that the lender will report the default to the credit reporting agencies. At the same time, the sale is still beneficial since the lender will also report that the balance of the loan has been paid in full, a factor that helps to prevent additional damage to the credit rating. This helps to increase the chances that another lender may be open to financing a mortgage for the consumer once he or she has resolved whatever financial issues led to the original default.