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.

Foreclosure bailout loans have become readily available over the Internet as lenders target people who are struggling to pay their mortgage. These kinds of loans are best avoided. Read on to find out why. (To learn about other options to avoid when you’re struggling financially, see What to Avoid When You Need Money.)

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. But some lenders make loans in an amount that's just sufficient to reinstate the defaulted loan.

Foreclosure bailout loans usually come from hard money and subprime lenders. The lender will generally require the borrower to have significant equity in the home and a credit score of at least 500.

Downsides to Foreclosure Bailout Loans

While some lenders and organizations offer legitimate loans that will help you avoid a foreclosure, others are merely looking to rip you off. Many bailout lenders will charge an exorbitantly-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.

Also, a bailout lender makes this kind of loan with the expectation that you'll probably default and go into foreclosure again. The lender knows that the foreclosure sale proceeds will repay the amount it lent you, plus interest, fees, and costs. Or, depending on the situation, the lender could get title to your home through the foreclosure process.

Other Options to Consider

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

• Contact your loan servicer and ask about what kinds of loss mitigation options (foreclosure alternatives) are available. You might qualify for a loan modification or another way to stop the foreclosure. If you have an FHA-insured loan, you might qualify for an interest-free loan that will bring the defaulted mortgage current (called a “partial claim”).
• You might be eligible to receive financial assistance from a Hardest Hit Fund program if your state offers this kind of help. The states that received Hardest Hit money have until the end of 2020 to use their funding, but some programs have closed early because their allotted money ran out. If you think you might be eligible for financial assistance from a Hardest Hit program, you should apply for help as soon as possible.
• You might be able to get an advance or emergency loan from an employer, nonprofit organization, or community group. 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 period of time.

Getting Help

If you’re facing a foreclosure, consider talking to a local attorney to learn how the process works in your state and to find out about your rights and options.

If you need help applying for a loss mitigation option, contact a HUD-approved housing counselor who will assist you at no cost. You should, however, be sure to avoid for-profit loan modification companies.