Loans to Stop Foreclosure: Your Options to Avoid Losing Your Home

Facing foreclosure can be scary and overwhelming. However, there are loans and programs available that can help homeowners in financial hardship avoid foreclosure and stay in their homes. This article will explain the different types of loans and assistance that may stop a foreclosure.

Communication is Key

The first step when facing foreclosure is to contact your mortgage lender or servicer immediately. Open communication gives you the opportunity to explain your situation and work out alternative arrangements Ignoring notices and letters from the lender only makes the situation worse

Be proactive and don’t wait until you’ve missed multiple payments The earlier you reach out, the more options you’ll have

Loan Modification

One of the main options for avoiding foreclosure is to apply for a loan modification. This adjusts the terms of your existing mortgage to make it more affordable.

Here’s how it works

• You contact your servicer to apply and provide financial documentation. This shows your hardship and inability to pay the current mortgage amount.

• The servicer reviews your application and proposed modification terms like:

  • Lower interest rate

  • Extended repayment term

  • Different payment structure

  • Adding missed payments to the balance

• If approved, you start making the new modified payments based on your new terms. This makes the loan affordable so you can avoid default.

To qualify, you’ll need to show financial hardship from an event like job loss, divorce, medical crisis, etc. Modifications are a top option because they let you keep your home under better terms.

Government Programs

There are also government-sponsored foreclosure prevention programs like:

• FHA loss mitigation – For FHA-insured loans, options like loan modifications, partial claims, and more.

• HAMP – The Home Affordable Modification Program helps with both temporary and permanent modifications.

• HARP – The Home Affordable Refinance Program lets you refinance an underwater mortgage.

• HAFA – The Home Affordable Foreclosure Alternatives program promotes short sales and deeds-in-lieu.

Contact your lender to see if you qualify for any applicable government programs. They provide incentives for lenders to work with struggling homeowners.

Refinancing

Refinancing replaces your current mortgage with a new one under better terms. You can potentially get a lower monthly payment to avoid default.

Two common refinancing options include:

• Rate and term refinance – Gets a lower interest rate and extends the repayment timeline. Results in lower monthly costs.

• Cash-out refinance – Takes equity out as cash while refinancing into a new loan. Use funds to catch up on payments.

Refinancing works best if you have equity built up and have maintained relatively good credit through your hardship period.

Home Equity Loan or Line of Credit

If you have sufficient home equity, a home equity loan or line of credit can provide funds to reinstate your mortgage and prevent foreclosure.

• Home equity loan – Takes out a fixed amount as a lump sum. Fixed payments and interest rate.

• Home equity line of credit (HELOC) – Acts like a credit card with your home as collateral. Draw funds as needed.

These tap your home’s equity so you can access a large cash amount quickly. Requirements are generally high credit scores and low debt-to-income ratios.

Short Sale

With a short sale, you sell your home for less than you owe and the lender agrees to forgive the remaining mortgage balance. This avoids foreclosure by paying off the loan, even at a discount.

Short sales work best if you owe more than the property’s current value. You’ll need lender approval and will take a credit hit, but not as bad as a foreclosure.

Deed in Lieu of Foreclosure

Also called a voluntary repossession, a deed in lieu immediately signs your property back over to the lender to avoid foreclosure. This only works if the lender agrees to accept it.

Benefits include potential forgiveness of any remaining mortgage deficit and avoiding foreclosure. But it requires moving immediately and hurting your credit.

Bankruptcy

Filing bankruptcy stops a foreclosure while debts get restructured or discharged. Common options include:

• Chapter 7 – Eliminates many unsecured debts including credit cards, personal loans, medical bills, etc. Won’t directly stop a foreclosure but provides financial relief.

• Chapter 13 – Sets up a 3-5 year repayment plan for debts. Can include mortgage arrears. Directly halts foreclosure during the payment plan.

This provides temporary relief and time to work with lenders on a long-term solution. Big credit impacts make bankruptcy a last resort.

Foreclosure Rescue Scams

When desperate to save their home, vulnerable homeowners can fall victim to foreclosure rescue scams. Avoid the following:

• Companies asking for large upfront fees before providing any services.

• Guarantees or claims of programs that will stop the foreclosure for sure.

• Requests to sign over property title or transfer ownership temporarily.

• Offers to “rent” you your home and buy it back later.

Only work with HUD-approved housing counselors and your mortgage servicer. Don’t fall for predatory scammers taking advantage of your situation.

Take Action ASAP

The key is taking action quickly when facing foreclosure. Communicate with your lender immediately and seriously consider all assistance programs available. This will provide the best chance of finding an alternative solution and saving your home.

While painful, foreclosure is not an automatic death sentence. Seek help through housing counseling agencies and explore modification options if possible. Loans and programs exist to help responsible homeowners get back on track and prevent foreclosure.