How Can You Avoid Foreclosure With Bad Credit?

If you’re worried about losing your home, it’s important to first know you’re not alone.

At least 30% of Americans missed their rent or mortgage payment in June and over a quarter of homeowners fear they might lose their house within the next six months.

No one actively chooses or wants to stop paying their mortgage. Fortunately, you do have resources available to help you keep your home and prevent foreclosure – even with bad credit.

If you contact your lender or apply for assistance, you have a much better chance of staying in your home and preventing foreclosure. But if you do nothing and just stop paying your mortgage, on the other hand, your chances of foreclosure are closer to 100%.

Can I Refinance If I Have Bad Credit?

Don’t write off refinancing yet! You still have options if your credit isn’t great. Avoid predatory lenders by asking about all fees and additional costs before signing anything. If you fall behind on payments due to hidden monthly fees, the lender could take your home.

Check with Your Own Lender First

Someone who’s seen you make regular payments or pay back past-due amounts is more likely to give you the benefit of the doubt if your credit or debt-to-income ratio falls into a gray area.

Home Affordable Modification Program (HAMP)

The federal government provides this option to refinance your home based on your new income and debt level. Typical program recipients see a 40% drop in monthly mortgage payments.

FHA Rate-and-Term Refinance

If you have a conventional mortgage, you might be able to refinance it under the Federal Housing Administration (FHA) with a rate-and-term refinance. Under this, a lender will check your credit and debt-to-income ratio. You’ll be able to renegotiate the mortgage rate and terms of the loan into something easier to manage.

Refinancing an Underwater Mortgage

Do you owe more money than your home is worth? Freddie Mac and Fannie Mae each have an option available specifically for homeowners who owe more than 97% of their home’s value. These may be worth looking into if you live in an area where home values have dropped recently.

Cash-Out Refinance

A cash-out refinance pays off your mortgage and opens a new loan for the amount you owe plus any cash you received. You’ll receive cash based on your home’s equity. Ideally, your interest rate and terms will be better than your current mortgage rate. Plus, you’ll have cash on hand to cover monthly expenses or debt from unexpected hardship.

Forbearance Expansion Under the CARES Act

The CARES Act introduced a moratorium on evictions and foreclosures until August 31, 2020, giving homeowners the time to apply for forbearance and other assistance programs.

Forbearance lets you pause your mortgage or reduce your monthly payment if you face temporary financial hardship such as a job loss, serious illness or injury, disaster, or death of a household wage earner.

You’ll still owe your missed payments, but you can spread them out over several months if you like. Forbearance might be the best route if you expect your financial situation to improve in about six months.

Fannie Mae, Freddie Mac, and other institutions recently expanded their forbearance programs as a response to COVID-19. Special funds earmarked under the CARES Act give you the right to apply for a six-month forbearance and another six-month extension.

You won’t incur any additional fees or penalties from your missed payments. You’ll only have to pay back your missed monthly payments and interest.

Start by contacting your mortgage lender directly and asking them about forbearance programs under the CARES Act. If you qualify, you’ll work out a plan detailing:

• The forbearance length
• Your repayment schedule
• Reduced payment amount (if your mortgage isn’t suspended completely)

If you can’t manage to pay back the missed amounts, you still have options. You might be able to roll them into payment due at final sale, modify your loan, or defer payments elsewhere. Each situation is unique.

Keep an eye out for future COVID-19 assistance packages too because they’re almost sure to include additional funds and protections to keep people in their homes.

Home Affordable Unemployment Program (UP)

Like forbearance, UP halts your monthly payments completely for up to 12 months while you look for a new job. Anyone recently unemployed might be eligible for this federal program.

Protect Yourself Against Scams

Unfortunately, the pandemic has also created new opportunities for scammers to prey on desperate homeowners. Scammers might contact you with false promises to buy you out of your mortgage with ulterior motives to phish your personal information or steal money.

Meanwhile, predatory lenders offer to help but put you at a higher risk of foreclosure with sky-high interest rates or too-good-to-be-true refinancing promises.

It’s common for fraudsters to “spoof” phone numbers, pretending to be your mortgage company, Fannie Mae, or other popular lenders, to earn your trust. Fannie Mae and legitimate lenders will never contact you to ask for personal details.

Remember:

• Never provide any personal information over the phone.
• Don’t let anyone fill out paperwork for you.
• Be wary of any rescuers that approach you.
• Let unknown numbers roll to voicemail and don’t respond to cold emails.
• Don’t let anyone negotiate with lenders “on your behalf” without checking their BBB listing and reviews.
• Don’t click any links in text messages or emails. Go directly to the homepage from a browser.
• If it sounds too good to be true, it probably is.

Even if a phone call looks like it’s from a legitimate company, hang up and contact them through the official number or customer service email.