Putting pen to paper on that mortgage is something you had worked toward for quite some time. All of those years of spending your hard-earned money renting an apartment or house from someone else had finally come to an end. Let’s talk about how to avoid foreclosure with bad credit.
Along with all of your other big goals and dreams, you knew that buying a home of your own was the next step you needed to take to launch you into the next phase of your life. This house would be where you could start your own family or give your already existing family the room to grow.
Everything was going according to plan. Well, that is, until a few unfortunate and unforeseen events took place in your life. For one reason or another, you’ve found yourself in a place where you are no longer able to keep up with all of your bills. Credit cards, student loans, car loans, and utility bills, among other things, have become a significant burden. And perhaps the one that hurts the most is your mortgage.
Thus far, you have been keeping up with your mortgage payments regularly, but now you are in an extremely challenging financial situation. Your current struggle may be due to a sudden illness that you or someone in your family is suffering from, a loss of employment, an unfortunate change in your marital status, or a variety of other reasons.
What’s clear is that you can barely keep up with your day-to-day needs, and you can no longer keep up with your mortgage. Keep in mind that missing your mortgage payment won’t put you in trouble immediately. Since your lender’s primary concern is getting paid back the money they lent you, they will send you various mortgage repayment notices over a certain period of time.
Things can become much more problematic when you continue to miss payment windows and eventually fall entirely out of step with the mortgage repayments and grace period your lender communicated to you. The length of this grace period, or the amount of time you have to make your payment before being penalized with a late fee, typically extends to 15 days after your due date.
At this point, your lender will begin taking certain action steps in an attempt to collect money from you and prevent any further losses. You will receive a notice in the mail with a late fee added to your overdue balance, along with phone calls regarding getting your mortgage paid up-to-date.
If 30 days go by, and you have not been able to rectify the situation up to this point, your lender will likely report this delinquency to the credit bureaus, which will impact your credit score. By the 36th day of your mortgage and any interest accrued being past due, the lending company will try to make direct contact with you to discuss mitigation options, either by phone or possibly in person.
By law, your lender must mail you a written notice with information about any assistance options that may be available to you no later than the 45th day of your delinquency. In most cases, they will also call you to go over this information and answer any questions that you may have about your available options to avoid foreclosure.
Fortunately, the foreclosure process is rather structured and can often be lengthy, so you will have some time to evaluate your options and try to come up with a plan so that you can act accordingly.
How to Avoid Foreclosure With Bad Credit
- Mortgage Repayment Plan
Sadly, your finances will not always work out as you had planned. There will be times that you find your expenses go beyond what you had budgeted for, and then you’re left trying to figure out how to take care of everything. A particular example of this type of scenario could be an illness, injury, or other medical expense that’s not covered by your insurance. In a situation like this one, you may simply have no other choice but to defer your mortgage payment.
If you are experiencing any short-term hardship that’s impacting your ability to pay your mortgage, it’s crucial to get in touch with your lender right away. The payments you’ve missed can typically be split up and added to the ones you are expected to make in the future. This way, you get to cover the payments you had missed while still staying current with your mortgage payments.
If you qualify for a payment deferral, you may even have the opportunity to immediately bring your mortgage payments up-to-date by having your past-due amount moved to the end of your loan term. The entire point of a mortgage repayment plan is to get your mortgage payment status back to current as soon as possible.
- Mortgage Modification
There may be times in your life where you experience a financial blip that sets you back a bit. A mortgage repayment plan may require you to increase the amount you are paying back to the lender or have hard deadlines that you cannot meet in your current situation. If you were to continue on your current repayment schedule, you might have to underpay or even miss the payment window to pay back the amount you had missed.
So, while a mortgage repayment plan is out of the question, it doesn’t mean that you are short of options. What you can do instead is negotiate with your lender for a mortgage modification.
If you are approved, changes will be made to the original terms of your loan. These changes can include reducing the interest rate, lengthening the period in which you have to repay the loan, or moving to a different type of mortgage. In some cases, it can also involve all three.
- Deed-in-Lieu of Foreclosure
The particular financial situation you are in will help determine what options are available to you. There are some situations where you see no way out and back to the progress you had made. If anything, the continued accumulation of missed payments and late fees means you will be facing even more of a burden should you not be able to get assistance due to your current credit score.
One way that you can avoid foreclosure is by offering your lender the deed to your property. Keep in mind that this option will be highly dependent on the state you live in and the rules that your lender operates by.
Before signing on the dotted line, you need to find out where the lender will waive any deficiencies, which would be the difference between the value of your home and the mortgage amount you were to repay. This type of agreement is very beneficial as it can help you avoid having to pay for any leftover balance.
- Mortgage Forbearance
Not every lender is out to get you, and many actually want you to succeed, seeing how lucrative your business is. Their decision may also be informed by the prevailing market conditions, which could make foreclosing on your property a poor business decision.
If your lender offers you a mortgage forbearance option, this will give you breathing room to get back on your feet financially while you continue to repay the mortgage. However, the repayment amount will often be lower than what was previously agreed.
Once your financial situation has improved, you will then be required to pay back the portion of payments that you missed, along with the difference in payment deduction from the original amount.
- Reverse Mortgage
A reverse mortgage is a loan that you don’t have to make your remittances every month to offset. What happens is you can receive the loan as a lump sum or as a line of credit. The loan principal and the interest are payable when you decide to give up the home.
A reverse mortgage can help you avoid foreclosure as you can use that loan to offset the accrued mortgage payments. In doing so, the equity you have in your home will be taken up by the lender.
These kinds of loans are available through various approved lenders through the Federal Housing Administration program known as Home Equity Conversion Mortgage (HECM). There are a few requirements you will need to meet to qualify for such a program, such as:
- You must be at least 62 years old
- You need to either have a small mortgage balance or full ownership of the property
- You must currently be living in the property
- You must not have any delinquencies on any federal debt
You will need to fulfill several other requirements, but the ones mentioned above are the most essential.
- Short Sale
This particular route of avoiding foreclosure is one that should only be reserved for a situation in which you see no possibility in your near future to recover from your dip in finances and retain your mortgage. A short sale is essentially selling your home for less than the amount of the actual mortgage or the loan you had taken out.
If this is the option you choose, you will need to have cleared the sale with your lender before putting the house on the market. With a short sale, you get to walk away from the property without experiencing foreclosure. However, your lender will keep all of the proceeds from the sale to clear your debt.
- Short Refinance
In some instances, your best option for avoiding foreclosure is to go back to the lender underwriting your mortgage to help you craft a solution. Out of the myriad of options available to you, one may be an agreement called a short refinance.
With a short refinance, the lender will refinance the mortgage on your home for the current market value. This means that the new amount you will refinance will typically be less than the outstanding mortgage amount you owe the lender, which is much more cost-effective for you.
A fair amount of lenders prefer this option, and sometimes they can even forgive the difference. Getting a short refinance is usually a much better prospect than having the house end up in foreclosure.
- Refinance With a Hard Money Loan
Hard money loans tend to go by a variety of names, such as bridge loans or asset-based loans. They are of particular interest to real estate investors and property developers, but they can also work wonders for you if you have poor credit.
What’s particularly attractive about a hard money loan is that, unlike these other debt instruments, they only take days or weeks, at most, to process. The downside to this type of loan is that it may come with a high-interest rate because they’re typically handled by private lenders and individuals rather than banks.
- Visit a Bad Credit Lender
There are various financial institutions that specifically cater to the bad credit market, offering homeowners a variety of options such as refinancing their home or even outright purchase. If you can’t get a good loan service from any other lender, the options you can receive from a bad credit lender will typically have lower interest rates than pay-day loan services.
Keep in mind that while securing a loan with bad credit is possible, it will require you to take the time to research and find the most affordable option.
10. Stay Away From Loan Sharks
You might be desperate to find a solution to the problem you are in and may also be running out of options, but take the time to think strategically before making any rash decisions.
A perfect example of a rash decision made under intense stress would be turning to shady lenders to help you get out of your current situation. While they may initially cool the fire, the consequences of such actions could be dire. A decision like this could end up costing you even more in repayments in comparison to bad credit lenders or having a sit down with your mortgage lender.
Get yourself a HUD-approved housing counselor and sit down with your mortgage lender so that they can help you come up with a solution to avoid foreclosure of your home. A certified HUD-approved housing counselor is specially trained to help you evaluate your financial situation, provide you with free foreclosure prevention counseling, and assist you with speaking to your lender to understand all of your available options.
Once you realize your financial situation has escalated to the point that you know you will continue to miss your mortgage payments until the unforeseeable future, it’s time to act fast and explore your options right away.
Get A Cash Offer For Your Home To Avoid Foreclosure
If you want to get a no-obligation cash offer for your home to avoid the headaches of foreclosure, click here and we’ll contact you.