One of the first solutions that homeowners facing foreclosure consider is simply refinancing their loan. After the first couple of times that they are turned down, though, reality quickly sets in: refinancing in foreclosure is quite difficult. This should come as no surprise, as lenders have been increasingly unwilling to make loans to people with low credit scores and no equity in their properties. Traditional loans may be out of the question for homeowners in foreclosure, who will have to try to qualify for a foreclosure bailout loan.
A foreclosure bailout is the term commonly applied to mortgage loans that homeowners can take out when they are facing foreclosure, and they differ quite a bit from traditional mortgages from a bank or broker. Although the loan terms and costs are similar to loans that can be used in other situations, these particular mortgages are marketed specifically to homeowners who have fallen behind in their monthly housing payments.
There are two common sources for foreclosure bailout loans, both of which offer somewhat similar programs. The first source is the small number of banks, either state or federally chartered, that specialize in loans based on equity. The second source is hard money lenders, which are essentially private sources of funding that make investments in real estate. Firms that specialize in matching homeowners to foreclosure lenders may be able to help homeowners locate either type of source that can lend in their state.
The main reason that homeowners consider these types of mortgages is that there is often no credit score requirement. Lenders offering loans to stop foreclosure are aware that late mortgage payments and a defaulted loan can drag down a credit score to below 500. This score would make it almost impossible for homeowners to get a loan through a traditional lender, so foreclosure bailout firms do not rely on credit scoring to quality a homeowner. They will often pull credit to determine how much income the homeowners are using to pay their other debts, but the score itself will not be used as a qualifier for the loan.
Closing costs and interest rates are often very high on foreclosure bailout loans. The lenders attempt to front-load the mortgages by charging several points at closing; this allows them to recoup many direct costs when the loan closes, instead of trusting that the homeowners will be able to pay them off through the monthly payments. Interest rates can range from 12%-20%, depending on the lender used, so homeowners may not be able to afford this type of loan if their financial situation has not stabilized. The best bet is to check rates with a number of different sources, as they can vary widely from one bailout company to the next.
The strict requirements of most foreclosure bailout loans make them somewhat uncommon as an option to save a house. Equity requirements can be quite high, with lenders refusing to go higher than 70% loan-to-value (LTV) on a property, and many will not go above 65% LTV. This requirement prices many homeowners facing the loss of their house out of the market for a foreclosure loan, unless they have the equity to qualify or can obtain funds to pay down their mortgage. This problem is even worse now, as property values have been falling throughout the country.
Income requirements for foreclosure bailout loans are often relatively easy to meet, compared to the equity needed to qualify. Homeowners may be able to use up to 55% of their monthly before-tax (gross) income to meet debt payments (housing and all other debt combined). This is quite a bit higher than many traditional banks or mortgage companies, which require debt-to-income (DTI) ratios to be much lower.
Because there are so few companies that offer this solution to homeowners, conditions and terms will be very different from one source to the next. Even after checking with numerous foreclosure lenders, however, homeowners may be forced to consider other options than refinancing their mortgage. Although shopping around for a refinance should be part of every family’s plan to avoid foreclosure, it should not be the only method considered. But when other options, such as trying to qualify for a mortgage modification or work with the current bank, have failed, fresh start with a new lender can often be a solid option to avoid losing the house.