When you’re facing foreclosure, it’s tempting to look for a fast fix that will keep you in your home. Foreclosure bailout loans offer just that. But with all the scammers and predatory lenders looking to take advantage of desperate homeowners, it’s tough to know which options are safe — and which ones are too good to be true.
To determine whether a foreclosure bailout loan is a good idea, start by assessing your options and weighing the long-term costs. Asking a few key questions will help you make an informed financial decision, even if you’re feeling the time crunch.
Related article: How do I avoid foreclosure?
What is a foreclosure bailout loan?
Foreclosure bailout loans are “hard money loans,” meaning they’re financed by private lenders rather than traditional banks. This significantly shortens the funding time frame, which is critical when you’re up against a tight payment deadline and a foreclosure sale date.
The loan could refinance the entire balance of the existing mortgage or simply provide the funds needed to reinstate the defaulted loan. Either way, foreclosure bailout loans use the home as collateral, which means they have high equity requirements. However, they also have fewer personal credit requirements than traditional loans, which makes them more accessible to people who have low credit scores (often as low as 500) or lack the necessary income documentation.
How much does a foreclosure bailout loan cost?
Foreclosure bailout loans come with hefty fees and much higher interest rates than traditional mortgages. While staying in your home might seem worth the cost, you’ll end up even deeper in debt if you default again in a few months — and you’ll still lose your home to foreclosure.
Ask your lender to clearly spell out how much you’ll owe each month (after all the fees), how long you’ll have to pay the full balance, and what penalties come along with late — or early — payments to avoid unpleasant surprises.
Are there alternatives to foreclosure bailout loans?
The other types of financing you might qualify for depend largely on your credit score, your income, the amount of equity you’ve built up in your home — and how far behind you are on your loan payments.
“If you’re at the doorstep of foreclosure, it’s unlikely you’d be approved for a [bank] loan big enough to get you caught up on your mortgage. It’s very credit-centric,” says Michael Bovee, financial expert and co-founder of debt-relief company Resolve.
However, the sooner you start asking for help from your lender, the more opportunities you’ll have, he says. If you reach out early, ideally before you default on your mortgage, your lender may be willing to modify your loan to reduce or delay your monthly payments. Highlighting any financial hardships you have experienced, such as the loss of a job or a death in the family, will improve your chances of coming to an agreement. Plus, if you have an FHA-approved loan, you might qualify for an interest-free loan that will get your mortgage out of default.
If you have a steady income, filing Chapter 13 bankruptcy could also allow you to stay in your home while you repay what you owe. A bankruptcy will stay on your credit report for seven years, making it harder for you to get future loans, but it could cost less than a foreclosure bailout loan over the long term.
Related article: How to file Chapter 13 bankruptcy
What red flags should I avoid?
The terms “mortgage consultant,” “foreclosure service” or “forensic loan auditors” should definitely give you pause. Scammers use this language to convince struggling homeowners that they will stop their foreclosure — for a fee. In reality, these con artists just pocket the cash without doing any work, often destroying their victim’s credit in the process.
Legitimate foreclosure bailout lenders and mortgage relief companies will not ask for payment upfront. Any company that guarantees to stop your foreclosure, tells you not to speak to your original lender, or asks you to transfer the deed to your property is most likely trying to take advantage of you.
Who can I ask for help?
Even if you sidestep the scammers, there are plenty of predatory lenders waiting to take advantage of homeowners who are strapped for cash. Before you move forward with a foreclosure bailout loan, get a trusted professional to help you weigh your options.
While lawyers can be expensive, there are many resources available to homeowners facing foreclosure. For example, the U.S. Department of Housing and Urban Development (HUD) sponsors free and low-cost housing counseling agencies across the country. And many nonprofit organizations offer free advice and assistance to help homeowners avoid foreclosure.
The right advisers can help you get a big picture view of your financial situation, outline the pros and cons of each choice you could make — and help you move toward a more stable future.
How Resolve can help
If you’re dealing with debt and not sure what to do, we’re here to help. Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.