Is your home in the process of foreclosure? If so, it’s not the only one; in 2023 alone, about 0.26% of all U.S. homes, or 357,000 residential properties, were in the same boat.
Fortunately, you have several ways to stop foreclosure, one of which is through a foreclosure bailout loan. As its name suggests, it’s a loan specifically for borrowers whose homes are in or about to get foreclosed. It stops foreclosure by paying off the borrower’s missed mortgage payments and balance.
However, this type of refinancing isn’t for everyone and only makes sense in certain situations.
So, when should homeowners consider taking out these loans to stop foreclosure? What about the circumstances wherein they aren’t the best option?
This guide answers all those questions, so read on.
When Does a Foreclosure Bailout Loan Make Sense?
A foreclosure bailout loan may make sense if your mortgage is already in “default.”
Usually, mortgage default means you’ve already missed three consecutive payments. At this point, your required payments are already 90 days past due.
Once you’ve reached that point, you still have 30 more days to pay your total overdue amount. This is thanks to federal laws prohibiting foreclosure until borrowers are at least 120 days overdue on their payments.
But if you only have 30 days before your home’s foreclosure begins, you’re less likely to qualify for typical bank refinancing. Many lenders also don’t refinance mortgages attached to foreclosed homes.
By contrast, refinancing past-due mortgages is what foreclosure bailout lenders specialize in.
So, a foreclosure bailout loan may make sense if you’re already in default and have no other means to pay your overdue account. The application process is usually quick, with many lenders making offers within a business day. Some lenders even accept applications from borrowers without requiring proof of income.
Because the application process is quick, you may get approved in just a few days. This gives you enough time to pay your past due amounts, even your entire mortgage balance. In doing so, you can stop foreclosure and maintain your home’s ownership.
When Foreclosure Bailout Loans Aren’t the Best Option
A foreclosure bailout loan isn’t the best choice if you only missed (or are about to miss) one mortgage payment. Neither is it your only option if you’re not in default yet.
In those situations, a foreclosure bailout loan may result in unnecessary expenses. A good enough reason is that many of these loans have interest rates higher than bank refinancing programs. Their origination fees and prepayment penalties also often cost more.
So, before taking out a foreclosure bailout loan, explore your alternatives first. Here are some of them.
Pay Within the Grace Period
Missing a single mortgage payment isn’t enough to trigger a foreclosure.
On the contrary, your lender may even give you a grace period of up to 15 days after your initial due date to pay. For example, if the payment was due on the first of the month, you have up to the 16th to settle and not worry about late fees.
Paying within the grace period also updates your account immediately. Your lender won’t report your late payment to credit bureaus, either.
Speak With Your Lender
Suppose you still can’t bring your account current within the grace period. You’re also worried that you may be unable to pay for the second, even third consecutive time. In this scenario, your best bet is to speak with your mortgage lender about loss mitigation.
Loss mitigation is when you and your lender work together to create a program for foreclosure relief and prevention. These include the following strategies.
Forbearance
Forbearance is when lenders put a temporary hold or reduction on mortgage payments. They do this for borrowers currently struggling financially but have generally been good payers in the past.
The duration of forbearance plans depends on one lender to another, but, in many cases, it’s often for three to six months. If that’s not enough time for your finances to recover, you may be able to request an extension. Sometimes, lenders allow these programs to last for 12 to 18 months.
Most loans in forbearance won’t have penalties, extra fees, or added interest. There’s also often no need to provide additional documents or requirements. The goal, after all, is to allow borrowers to build back their finances.
Then, once the forbearance period ends, borrowers must start making payments in full again.
Loan Modification
Your lender may be willing to modify your loan terms to make your payments more affordable. For example, they may lengthen its term, which lowers your monthly due amount. Since you’ll pay less monthly, you may find this easier to fit into your budget.
Deferral or Partial Claim
Your lender may allow you to add some of your missed payments to your loan’s backend. You can think of this as a way to “reschedule” their (now past) due dates. You must then pay them back when you refinance or sell your house.
Apply for a Low-Interest Emergency Loan
You may be able to get a low-interest emergency loan from your employer, community group, or a nearby nonprofit organization. The loan amounts vary, but they may be enough to help you pay one to a few months’ worth of mortgage payments.
If you qualify for such a loan, you can use its proceeds to pay off your past-due amounts. This can help return your mortgage account to current. It prevents your loan from going into default and thereby triggering foreclosure.
Consider a Foreclosure Bailout Loan Only When Necessary
A foreclosure bailout loan can stop foreclosure and help you retain home ownership. However, it can add more to your overall mortgage-related expenses. It can also cost you more in the long run than a traditional refinance.
So, explore your alternatives first, including loss mitigation and low-interest emergency loans. Then, if you don’t qualify for these other options, you may consider applying for a bailout loan.
Are you looking for other finance and home-related tips and tricks? If so, check out our latest blog posts for more guides like this!
