Why You Should Avoid Foreclosure Bailout Loans

If you're behind in your mortgage payments and facing an impending foreclosure, it can be difficult to make sound financial decisions. But even if you're desperate to get your hands on some fast cash, don't jump at the easiest opportunities, like getting a foreclosure bailout loan.

What Is a Foreclosure Bailout Loan?

A "foreclosure bailout loan" is a mortgage loan designed to stop a foreclosure. Usually, the foreclosure bailout loan will refinance the entire balance of the existing loan. However, some lenders make loans in an amount that's just sufficient to reinstate the defaulted loan.

In other situations, a foreclosure bailout loan can consolidate debt, reducing the homeowner's total monthly payments on debts other than the mortgage. Consolidating other debts can make it easier for homeowners to make their mortgage payments and catch up on delinquent amounts.

Where Can I Get a Foreclosure Bailout Loan?

Foreclosure bailout loans, which usually come from hard money and subprime lenders, are available over the internet as lenders target people struggling to pay their mortgages. The lender will generally require the borrower to have significant equity in the home, probably at least 25%, and a credit score of at least 500.

These loans tend to have higher interest rates and shorter terms but they can offer a quick solution when traditional financing options aren't available.

Downsides to Foreclosure Bailout Loans

Foreclosure bailout loans are best avoided. Here's why.

• Foreclosure bailout loans are typically expensive. Many bailout lenders charge a very high interest rate, a pricey origination fee, and perhaps a hefty prepayment penalty if you pay the loan off early. Foreclosure bailout loans are usually predatory because they target desperate homeowners taken in by aggressive marketing and promises of a quick, easy way to stop a foreclosure.
• You might be increasing your debt, putting you at risk of default and foreclosure in the future. While these loans can help avoid immediate foreclosure, they can also increase your overall debt load. If you don't improve your financial situation, you might risk another foreclosure later on if you can't keep up with the payments. In fact, a bailout lender makes this kind of loan expecting that you'll probably default and go into foreclosure again. The lender knows that if a third party buys the home at the foreclosure sale, the sale proceeds will repay the amount it lent you, plus interest, fees, and costs. Or the lender could get title to your home through the foreclosure process and then sell the property to a new owner, and probably make a profit.
• You might get scammed. While some lenders and organizations offer legitimate loans to help you avoid a foreclosure, others are merely looking to rip you off. Always be cautious about who you are borrowing from, and verify the legitimacy of any loan offers.

Other Options to Consider If You Want to Stop a Foreclosure

If you're struggling to make your mortgage payments and facing foreclosure, consider options other than taking out a foreclosure bailout loan.

• Explore loss mitigation options. Contact your loan servicer and ask what kinds of loss mitigation options are available. You might qualify for a repayment plan, forbearance, loan modification, or another way to stop the foreclosure. If you have an FHA-insured loan, you might be eligible for an interest-free loan that will bring the defaulted mortgage current (called a "partial claim").

• Look into government assistance programs. You might be eligible to receive financial assistance from your state's Homeowner Assistance Fund (HAF) program. If the HAF program in your state is closed (many have run out of funding), your state's housing agency might have information about other housing assistance programs offered through your city or state. For example, if you're facing a foreclosure in Connecticut, you might be able to get a fixed-rate loan from the Connecticut Housing Finance Authority. This kind of loan will bring your mortgage current and cover the monthly payments for a specific amount of time.
• Get an emergency loan from a local organization. You might be able to get an advance or emergency loan from an employer, nonprofit organization, or community group.
• Consider filing for bankruptcy. In some cases, filing for Chapter 7 bankruptcy can delay foreclosure proceedings and give homeowners a fresh start. Chapter 13 bankruptcy can provide a way to catch up on mortgage arrears, although it will affect your credit for years. (However, a foreclosure on your record also severely damages your credit.)

Getting Help Avoiding Foreclosure

If you're facing a foreclosure, consider talking to a local attorney to learn how the process works in your state and find out about your rights and options. If you need help applying for a loss mitigation option or want to learn about any mortgage assistance programs in your area, contact a HUD-approved housing counselor who will assist you at no cost.

You should, however, be sure to avoid for-profit foreclosure rescue companies.