Finding the perfect property for your family or business is not an easy task. You have to make sure that every detail meets your requirements, prepare the paperwork to acquire the property, and, if necessary, get a mortgage before you can finally move in. Once you settle into your gem and everything with the property is going great, losing the property may be the last thing you have in mind.
Unfortunately, not everything goes as planned. You may have lost your job due to the pandemic, have been ill or injured, or have undergone a dispute with your business partner. These situations result in missed mortgage payments, and in most cases, foreclosure typically follows.
When caught in a foreclosure, it is easy to feel discouraged and hopeless. But before you turn your back on your beloved property, you should consider this one creative solution – a foreclosure bailout loan. Though the terms vary from lender to lender, this loan is available to almost every borrower, even non-U.S. citizens. It helps borrowers start anew without losing their properties and the life they have built in them.
This article will introduce you to the basics of foreclosure bailout, your loan options, and how you may qualify for one.
If you are interested in other creative loans, here are the unconventional mortgage loans for all types of borrowers and other creative commercial real estate loans with flexible requirements.
When a borrower takes out a commercial or residential loan, the property being bought or refinanced acts as security for the loan. This collateral gives the lender additional protection. In case the borrower defaults by missing payments, the lender can foreclose on the property to sell it and use the proceeds to pay the outstanding debt.
But what exactly is foreclosure?
Foreclosure is the process of repossessing the property from a borrower who defaults on their mortgage. While failure to make several monthly payments remains the most common reason for default, there are other less common types of default. For example, lenders typically require borrowers to keep their property in the same condition and form as it was during the loan application process. However, some borrowers may overlook this requirement, and do major renovations of their properties without consulting with the lender first. Though their payments are up to date, these major improvements can still be grounds for default.
On the side of the borrower, the most common reasons for missing payments or otherwise defaulting on the mortgage include:
After the foreclosure, lenders try to sell the repossessed properties through auction. Typically, the bidding starts at the amount owed to the lender plus other foreclosure fees. Then, the highest bidder wins the residential or commercial property, and payment is made thereafter. The guidelines on foreclosure sales vary from state to state, but generally, lenders are not allowed to profit from the auction. So, any amount in excess of the debt and the associated fees goes to the foreclosed property owner.
If, on the other hand, the property is not sold during the auction, the lender retains the ownership, and the building becomes what is known as a real estate owned (REO) property. The lender hires a local real estate agent to list and market the property until it is eventually sold.
Foreclosures can be further categorized as judicial or non-judicial. Depending on the state in which the property is located, your specific lender and loan program, you may need to undergo either of these two if faced with a foreclosure.
The key difference between judicial and non-judicial foreclosures is the presence of the power of sale clause in the mortgage note. Basically, this clause gives the lenders the authority and permission to foreclose and sell any property, where the owner is delinquent in their payments, to recover the remainder of the unpaid loan.
Mortgage loans without the power of sale clause must undergo the judicial foreclosure process. Under this option, the lender files a foreclosure complaint in court against the borrower. With or without an attorney, the borrower can respond to the complaint and raise any defenses against the foreclosure. At any point during the litigation, the parties may reach a settlement (where, for example, the lender agrees to take a short payoff and dismiss the lawsuit), or the case proceeds to trial. If the lender prevails, the court will enter a judgment allowing the property to be sold at auction. If the borrower prevails, judgment is entered in favor of the borrower, and they get to keep the property.
Generally, judicial foreclosures may happen in any U.S. state, but there are 22 states which allow this type of foreclosure only. For example, in Florida, lenders cannot directly foreclose a property unless ordered by the court. So, if a lender has a delinquent mortgage, they must first file a lawsuit in the county’s Circuit Court. The lender cannot take possession of the property until a judgment of foreclosure is obtained from the court. Obviously, this process is more time-consuming than the non-judicial process, but it nonetheless provides more protection to the property owners.
Judicial foreclosure is also required in Connecticut, Illinois, New York, South Carolina, and several other states.
Non-judicial foreclosures are faster, requiring the struggling borrowers to act faster.
Residential and commercial mortgages with the power of sale clause can be foreclosed and auctioned without going through the judicial system. If a borrower fails to make several mortgage payments, the lender sends a warning letter and provides a waiting period without the interjection of the court. If the borrower still fails to settle the overdue payments during this waiting period, the lender proceeds with the foreclosure and auction without the need for a court order. In case the mortgage is under a deed of trust, the trustee – typically a title company – can also repossess and auction the property even without a court judgment.
More states employ this straightforward foreclosure process, which includes California, Massachusetts, and Texas, just to name a few.
When caught in a financial dilemma, judicial foreclosure offers more room for borrowers to fix their finances. This is primarily because this process takes a long time, typically lasting from a few months to years depending on the state laws.
For example, the borrower must typically be in arrears for at least 120 days before the lender can start the foreclosure process. The lender must also send a written notice to the borrower, giving them 30 days to settle the overdue payments. Only after these waiting periods are met will the lender be allowed to file a lawsuit against the property owner. As you can imagine, this entire process takes a long time, especially during the pandemic when the court system is very backed up due to COVID.
In contrast, non-judicial foreclosure happens significantly quicker than its judicial counterpart. Under this process, the lenders need not go through the court system because they have the authority to do the foreclosure and auction on their own. Thus, borrowers facing a non-judicial foreclosure are prompted to act quickly to ensure that they remain in possession of their properties. And during these urgent needs, foreclosure bailout loans save a lot of borrowers from potentially losing their homes and business establishments.
A foreclosure bailout loan is a special kind of bridge loan specially designed for borrowers who are caught in foreclosure. Like other hard money loans, it is characterized by its quick closing, saving the property from being sold at auction.
In essence, this niche loan replaces the existing mortgage by paying the entire balance, ultimately replacing the old loan with a new one. Once this payoff is made, any foreclosure progress that has been made by the original lender will be halted, and eventually dismissed, allowing the property owner to retain possession of their real estate.
Once the foreclosure has been dismissed, the borrower then pays their new monthly mortgage to the new lender – that is, the foreclosure bailout lender. For additional information, here is everything to know about bridge loans and your mortgage options (if not in a foreclosure).
Foreclosure is not a straightforward process. It involves several stages, all of which are important to ensure that the rights of both the lenders and the borrowers are protected. Fortunately, a foreclosure bailout loan may come in handy at any of these stages, regardless if you initially knew that this loan is your sole chance of getting out, or if you expected another source of income that ultimately did not come at the last minute.
To better understand, here are the different stages of the foreclosure process:
This is the very first stage of foreclosure. After the borrower misses several mortgage payments, usually 3 to 4, the lender issues a notice of default.
A notice of default, sometimes called a notice of public auction, is given to the borrower as a formal warning that if the arrears are not paid, the borrower runs the risk of losing their property. This notice may also be filed with the state court, and the county recorder’s office in the case of non-judicial foreclosure. Note that the notice of default is also reported to the credit bureaus, meaning that borrowers may experience more difficulties qualifying for a new mortgage once a notice is filed under their names.
At this point, the borrower has several options to take to keep their ownership.
Forbearance is one option. Through this, a property owner may consult with their lender and ask to pause their mortgage payments for a limited period as they build back their finances by increasing their income or reducing their debt. Importantly, forbearance does not mean your payments are forgiven or erased. You are still obligated to eventually repay any missed payments.
Another option is to request a loan modification. You may ask the lender to extend the repayment period or reduce the interest rate to make the payments more manageable. Alternatively, you may ask your lender to forgive a portion of the loan principal or add the overdue payments and fees to the loan balance.
Reinstatement is a third option. Once the financial difficulties have passed and you have fixed your finances, you may opt to repay the arrears as lump-sum, making your mortgage current once again.
Unfortunately, sometimes, these options have been exhausted and the borrowers see themselves missing their payments once again. If you feel like these options would not work for your case anymore, then getting a foreclosure bailout loan is the next feasible option. Using the loan proceeds, you would be able to settle the debts in full, starting your mortgage anew.
Say the borrower cannot or did not push for reinstatement, or any forbearance or loan modification requests failed. The next move for the lender is to file a lawsuit requesting the court for a foreclosure sale if the property is located in a judicial foreclosure state. If non-judicial, the lender will have the trustee record the notice of default in the county recorder for their intention to hold a foreclosure case.
At this point, the borrower may retry negotiating the loan modification request with their lender. Its likelihood of success is low, but not zero, so it is always worth a try.
If the renegotiation fails and you insist on keeping the property, the next logical move is to hire an attorney and fight the foreclosure case. While this is a logical step, it also is expensive. Hiring an attorney requires you to pay attorney’s fees and it comes without the guarantee of success.
For this reason, many foreclosed property owners resort to taking a foreclosure bailout loan at this point. They get to keep their property, they get to use their time and resources more efficiently, and they are saved from making hefty payments just to fight the case.
For example, a foreclosure bailout loan helped a married couple save their home in Tampa, Florida after repeated failed attempts to do loan modifications. Another couple battling a 7-year foreclosure case was also able to refinance their waterfront property in Broward County, Florida, ultimately stopping the scheduled sale that was on its way.
The last stage of a foreclosure is the auction stage. Under judicial foreclosures, this happens once the lender wins the case and the judge enters an order scheduling the property auction. In non-judicial cases, the lender simply has to wait until the warning and waiting period is over. Then, the lender can schedule the auction at their discretion.
Once the foreclosure case reaches the auction stage, the borrower is essentially left with no other option but to refinance through a foreclosure bailout loan. But despite the pressing need, most creative lenders can still refinance these borrowers to make sure they do not lose their beloved homes or commercial real estate.
For example, a permanent resident alien saved his investment property in Miami, Florida just four days before the sale date using this creative loan. In special cases, a bailout loan may also help you buy your property back even after the auction took place as was the case for a family in Miami, Florida.
As it is a very niche, out-of-the-box lending product, the exact terms for this type of loan vary greatly depending on the lender, but the most important criteria include the value of the property and the amount of equity the owner currently has in the property. However, to give you an idea of what to expect once your loan application has been submitted, here are some rough parameters for foreclosure bailout loans:
Your loan amount is dependent on the value of the property being financed and the risk your lender is willing to accept. While there is no maximum amount, the minimum loan amount is usually set at $500,000 (with lower loan amounts allowed on a case-by-case basis).
Your LTV reflects how much risk the lender is willing to accept in exchange for your loan. It is calculated by dividing the loan amount by the property’s appraised value.
For foreclosure bailout loans, a borrower may receive an LTV of 50% or 65% (depending on the location of the property and other criteria) or even higher on a case-by-case basis.
Recognizing the damage of the foreclosure to the borrowers’ credit scores, this creative loan typically does not require minimum FICO scores. This gives all property owners the chance to refinance their real estate even after the delinquent mortgages are reported to the credit bureaus.
As a trade-off for the borrowers’ creditworthiness not being a factor, the majority of the weight is placed on the value of the property itself. To come up with your loan offer, the lender bases their decisions on the property’s value, location, and other attributes. The lender will order an appraisal, which determines your LTV, and consequently, your loan amount.
If the borrower has enough equity in the property to begin with, it is possible for the borrower to obtain cash-out proceeds from the foreclosure bailout loan. This excess cash can be used to pay off debt or do some property renovations.
For example, if the appraised value of your property comes in at $1M and you qualified for 65% LTV, then your loan amount is $650,000. If you have built up enough equity in your property and your outstanding debt to the original lender is lower, say $600,000, then you may leave the closing table with excess cash in your pocket, after paying closing costs. See for example this permanent resident alien who was able to refinance their loan through a foreclosure bailout loan and take home an excess of $6,000.
Compared to other mortgages, this type of loan comes with higher interest rates because of the high level of risks associated with it. While this may vary for each lender, the interest rates typically range from 8% to 15%.
Foreclosure bailout loans are short-term financing typically lasting up to 1 to 3 years. As a borrower, you may opt to do interest-only payments during the life of the loan, which means that the principal is paid at maturity. The short repayment period also necessitates borrowers to have a clearly planned exit strategy to shift to a permanent loan once their finances improve.
This depends on your lender and the specific loan program, but often, these loans come with prepayment penalties. However, other lenders do not impose such a penalty. This means that the borrower may repay the loan anytime their cash flow permits. If you have the cash on hand, paying your loan fully saves you from the high-interest payments associated with this loan.
There is no limit on what type of property can be refinanced through a foreclosure bailout loan. Basically, all residential and commercial real estate types are eligible for this loan.
Foreclosure does not always have to mean moving out and leaving the properties that have been significant parts of your life and business. Sometimes, you just have to find alternative solutions that are within arm’s reach, which in this case, is a foreclosure bailout loan.
Just keep in mind that as a short-term loan, the borrower must have a key exit strategy in place. This way, further issues will be avoided, ensuring that no foreclosure will happen in the future. One way to look at it is to think that a foreclosure bailout loan affords you, as a borrower, enough room to address the root problems and get your finances back in order. For example, if unemployment was the reason why you missed your payments, you must try to find a new job or other sources of income so that you will soon qualify for a traditional mortgage.
We know you already have a lot on your mind, and you do not have to sift through all the information provided by lenders just to get a foreclosure bailout loan. There are mortgage brokers, including DAK Mortgage, who specialize in these types of loans. So, if you are ready to start the process, contact us today to learn your options.
