What is a Foreclosure bailout?

Answer 1

A foreclosure bailout is the term commonly applied to mortgage loans that homeowners can take out when they are facing foreclosure. Although the loan terms and costs are similar to loans that can be used in other situations, these particular mortgages are marketed to homeowners who have fallen behind in their monthly housing payments.

There are two common sources for foreclosure bailout loans, both of which offer somewhat similar programs. The first source is the small number of banks, either state or federally chartered, that specialize in loans based on equity. The second source is hard money lenders, which are essentially private sources of funding that make investments in real estate.

The main reason that homeowners consider these types of mortgages is that there is often no credit score requirement. Lenders offering loans to stop foreclosure are aware that late mortgage payments and a defaulted loan can drag down a credit score to below-500. This score would make it almost impossible for homeowners to get a loan through a traditional lender, so foreclosure bailout firms do not rely on credit scoring to quality a homeowner.

Closing costs and interest rates are often very high on foreclosure bailout loans. The lenders attempt to front-load the mortgages by charging several points at closing; this allows them to recoup many direct costs when the loan closes, instead of trusting that the homeowners will be able to pay them off through the monthly payments. Interest rates can range from 12%-20%, depending on the lender used, so homeowners may not be able to afford this type of loan if their financial situation has not stabilized.

The strict requirements of most foreclosure bailout loans make them somewhat uncommon as an option to save a house. Equity requirements can be quite high, with lenders refusing to go higher than 70% loan-to-value (LTV) on a property, and many will not go above 65% LTV. This requirement prices many homeowners facing foreclosure out of the market for a foreclosure loan, unless they have the equity to qualify or can obtain funds to pay down their mortgage.

Income requirements for foreclosure bailout loans are often relatively easy to meet, compared to the equity needed to qualify. Homeowners may be able to use up to 55% of their monthly before-tax (gross) income to meet debt payments (housing and all other debt combined). This is quite a bit higher than many traditional banks or mortgage companies, which require debt-to-income (DTI) ratios to be much lower.