About Loans for People in Foreclosure

Homeowners have several options when trying to rescue their home from foreclosure. Negotiating new mortgage terms with the lender is one option, as is selling the home. There is one more option that many homeowners overlook: loans for people in foreclosure.

Misconceptions

Banks do not give homeowners a loan simply because they are in foreclosure. You must first apply for the loan and then meet the requirements of the loan. These requirements are the same as those for refinancing a home, because that is what you are doing. You must have equity in the home and meet credit and income requirements, which may be difficult as you are already behind on mortgage payments. Another misconception is that these loans are easy to obtain. They are actually harder to get than any other loan. The bank is essentially lending to someone who has proven that they can't handle a mortgage. For that reason, the homeowner must have equity in the home and stable employment.

Benefits

The biggest benefit of a loan to stop foreclosure is that the family gets to keep their home. In many cases, the original lender will handle this loan. The banks want a return on their money, and will not get it if the home goes on the auction block. Many homeowners can benefit from a loan to stop foreclosure in other ways. First, they can usually get a lower interest rate, and in turn, a lower and often more affordable mortgage payment. Second, the homeowner can negotiate a fixed mortgage that will lock in the low payments for the life of the loan. Last, refinancing will improve credit damaged by the near foreclosure. It brings the delinquent mortgage current, boosting the credit score.

Types

All loans that function to stop foreclosure do so by refinancing their home. Home equity loans are one such loan; however, the borrower must have equity in the home. Other loans, called "work out loans," also involve refinancing, but are geared toward helping the homeowners in trouble. Lenders use them to modify mortgages that have adjusted rates and outrageous terms. It is not a new loan, but a modification of the old one. Government bailout loans are workout loans. There are also swing loans and bridge loans which operate in the same way.

Warning

Stopping foreclosure with a loan does not exempt borrowers from paying the mortgage. It also does not exempt them from future foreclosure due to nonpayment. There is also no guarantee that the new terms will be better than the original mortgage terms. One borrower may save hundreds of dollars, others only tens of dollars. No matter what the terms are, the mortgage must be paid or foreclosure proceeding will begin again. Refinancing will use up the existing equity in your home. It will also put you, in some cases, deeper in debt. The desperate nature of a borrower in foreclosure makes them more susceptible to fraud. Therefore, borrowers should exercise caution in finding these types of a loan.

Function

In a workout loan, the lender modifies the existing loan terms. You must be behind on your mortgage, but have some equity in the home. Refinancing repackages the original mortgage into a more appealing one with better terms. The home must be worth the amount of the refinanced loan, thus equity is needed. Sometimes other collateral is also required. Unfortunately, if the lender does refinance the original debt for more than the house is worth, the interest on the excess debt is taxable. By the same token, most workout loan debt is considered home equity debt, the interest from which is tax deductible.