If you’re facing foreclosure, a bailout loan may be the best way to reinstate your mortgage and keep your home. This bridge-type loan helps you keep your home by paying the amount necessary to bring your loan out of default.
Here’s how a foreclosure bailout loan works.
Foreclosure Bailout Loans
What are They and How do they Work?
What is a Foreclosure Bailout Loan?
A foreclosure bailout loan is a short-term loan to help you get back on your feet and not lose your home. They pay out fast, allowing you to take care of the past due amount and legal fees to stop the foreclosure.
Foreclosure bailout loans can cover the entire loan amount or strictly the amount required to reinstate the loan. Unlike traditional mortgage loans, foreclosure bailout loans don’t focus on a borrower’s credit score. Instead, they focus on the collateral and how much equity you have in the home.
How do they Work?
To secure a bailout loan, you must have a current appraisal on the property and prove you can afford to repay the bailout loan and your existing mortgage if you only finance the defaulted amount.
Most foreclosure bailout loans have fewer documentation requirements and fund within a short timeframe to help you save your home and not become homeless.
The interest rates on bailout loans are higher than typical mortgages because of the risk lenders take when bailing you out of foreclosure. Most bailout loans also have origination fees to cover the cost of underwriting and funding the loan.
If you borrow only enough to reinstate your defaulted house, you’ll likely have a short-term loan, as short as 12 months. However, if you refinance the entire mortgage amount, including the default, you’ll have a longer term.
The Stages of Foreclosure
Foreclosure has a few stages. In each stage, homeowners have different rights, and in each stage, a foreclosure bailout loan can be helpful. So whether you realize you need a bailout loan immediately upon defaulting or right before the final hour, there are ways to help save your home.
Notice of Default
The Notice of Default is the first stage of foreclosure. In this stage, which usually occurs after you’ve missed three or four payments, the lender sends you a Notice of Default which is a formal warning that you are behind and you’re at risk of losing your property.
This information becomes public record and might be filed with the courts. Therefore, to keep your home, you have one of three options:
1. Forbearance — If you’re experiencing temporary difficulties, you can ask the lender to pause your payments while you get back on your feet. After the forbearance period ends, you’ll owe the payments you didn’t make or must work out a plan to add them to the loan.
2. Loan modification — Some lenders may be willing to modify your loan terms, forgive a part of the balance, or reduce the interest rate to make your payments more affordable.
3. Reinstatement — You can reinstate the loan by paying the total amount missed. This is usually done with a foreclosure bailout loan providing the funds.
Pre-Foreclosure
If you don’t reinstate your loan in the Notice of Default stage, the lender will file a motion with the courts. This motion is to ask for a foreclosure sale. At this point, a forbearance or loan modification isn’t likely, so your only option is to lose the home or use a bailout loan to repay what you owe.
Auction
The auction stage is when most homeowners lose their homes. At this point, though, you can still use a foreclosure bailout loan to pay back what you owe and keep your home.
Qualifying for a Bailout Loan
Bailout loans are a niche product, and each lender has different requirements. Lenders generally allow an LTV of 50% – 65%, and don’t worry much about your credit score. Instead, they focus on the property’s value and how much equity you have in it.
You must also prove you can afford the payments, as most bailout loans have short terms of 1 – 3 years.
Final Thoughts
Foreclosure bailout loans keep homeowners from losing their homes. They are a niche product that allows you to handle your past due amounts without getting in over your head. As long as you have a decent amount of equity in your home, the appraisal shows the home’s true value, and you prove you can afford the repayment, you’ll be on your way to saving your home.
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