Homeowners facing the loss of their homes due to a financial hardship often just primarily on getting a new line of credit to stop foreclosure. In effect, they are trying to solve a debt problem by taking on more debt, refinancing their mortgage or taking out a personal loan or car title loan to get the funds to pay back the arrears. There are a number of loan products that they may even be able to qualify for, if the foreclosure process has not gone too far, but homeowners should carefully examine their options for foreclosure loans, to make sure they are getting into an affordable payment and not simply postponing the inevitable.
The first obstacle that homeowners facing a financial crisis will have to overcome is a low credit score. Although their credit may be reasonably healthy in the beginning stages of the hardship, once they begin missing mortgage payments, their credit score will drop dramatically and it will be very difficult to obtain any kind of loan, mortgage or otherwise. This will force them to rely on alternate sources of financing, such as private real estate investors, subprime lenders specializing in bailouts, or hard money lenders, that may not offer terms in favor of the homeowners. The qualification guidelines will be drastically more difficult to meet, and costs for these types of mortgages may seem very expensive.
Additionally, the current foreclosure crisis in the real estate market has caused many lenders to go out of business, and many more to tighten their lending guidelines. One hundred percent, stated income, interest only loans are simply no longer available, and homeowners who obtained loans such as these may have very little equity to work with. Hard money lenders, while not hit quite as hard as subprime lenders, are also experiencing decreases in the value of their mortgage holdings, due to the softening market. And decrees in home values are sucking the wealth out of communities, as local homeowners turn into renters, and large corporate banks end up owning vast portions of cities, unable to sell them to a market that no longer exists. These current events will continue to make qualifying for a refinance to prevent foreclosure very difficult.
However, the most difficult qualification to meet for any loan to stop foreclosure will be the equity requirement. With banks that specialize in these kinds of loans, the house will usually have to have 70% loan to value as a minimum. Some start even lower, at 60-65%; This makes a vast number of foreclosure victims immediately unqualified to obtain financing. The bank, because they are aware of a great danger of having to foreclose on the house again, wants to know that they will have their loan paid back through the proceeds of the sheriff sale, and such low loan to value properties have a better chance of meeting this aim. There is also a better chance that they will be able to sell the property on the open market for very little but still make a profit, if they have to foreclose on the loan and end up owning the house after foreclosure.
Furthermore, interest rates from foreclosure bailout lenders or hard money lenders can be reliably high. Depending on which lenders are chosen and what their individual guidelines are, payments can be in the range of 11-15% on the low end, and up to 18-20% at the highest point. These loans are designed for homeowners who experienced a temporary financial setback but are now able to afford a higher mortgage payment in exchange for the chance to establish an on-time payment history again and save their home. If the homeowners have not repaired their financial situation and established good spending habits, these qualifications will ensure that they can not find a solution to foreclosure by going this route, and other options to prevent foreclosure will have to be considered.
Private investor options are often the most flexible in terms of payments and equity considerations. The homeowners will not have to give up their ownership rights to the home in all circumstances, if they use a land contract option, or they may have the right to purchase back their property after a certain period of time under a lease agreement. Also, investors are often more willing to work directly with the foreclosure victims, because they are more concerned with the equity in the house and its potential future profit and monthly cash flow, and they can negotiate with the foreclosing bank for a short sale to generate even more equity. But these considerations also work in the homeowners' interests, because more equity in the property will require a smaller mortgage, which will be accompanied by lower payments. This can give the foreclosure victims a little bit of extra cash every month that they can use to save for a rainy day or pay off other debts.
Other loan programs, such as payday loans or car title loans, are often the most predatory of all plans a homeowner can take to save their home. In almost all cases, relying on such loans during a financial hardship is almost a guarantee for future financial problems, and will result in the foreclosure victims becoming even further behind on monthly expenses. Although there is a place and time that these loans can help homeowners out of a tight situation, they should be avoided when there is a serious financial hardship that does not have an end in sight. And they should be considered as a last resort to make a payment, rather than a short term solution that can be relied upon upon numerous times to keep a property out of foreclosure.
Homeowners have numerous options when looking at loans to save a home from foreclosure, but the qualifications for many of these loans will be difficult (if not impossible) to meet. Due to the drawbacks and difficulties with these loans, using debt to solve a debt problem should be one part of the plan to stop foreclosure, but it should not be the only part. Other options need to be considered in addition to credit, especially working with the lender, selling the home, and filing bankruptcy to avoid foreclosure. The problem of losing a home can be solved in various ways, but every situation requires a unique perspective and several backups in order to be successful. Loans of any kind are just one part of the equation in homeowners helping themselves to understand what can be done to resolve their current problem and ensure they have a long term plan to prevent going into foreclosure ever again.