Can you refinance a house in foreclosure?

Answer 1

Refinancing a house is possible when facing foreclosure, but it is certainly not a very easy option. Homeowners who have recovered from a financial hardship and can prove enough income and job stability may want to try applying for a foreclosure loan, but it is important to have backup plans in case the loan does not go through.

There are very few traditional lenders who will do foreclosure refinancing loans, though, so homeowners need to search for alternative sources of funds. These usually include banks that specialize in equity-based lending and hard money lenders.

Banks that specialize in this type of situation often require there to be high levels of equity in a property. They may not loan more than 65% of the value of the property, which puts many homeowners out of the running for a loan. With declining property values, it is becoming even more difficult to qualify for a foreclosure bailout loan from a traditional lender.

Hard money lenders are almost no different in terms of their requirements. They may go up to 70-75% of the value of the house, but this still makes foreclosure loans somewhat uncommon. These lenders often charge a much higher amount on the front end of the loan, as well, taking 4-5 points right when the loan closes. This makes it a more expensive loans over the long term, as homeowners need to pay back the interest on these extra charges.

Declining property values and the trend in the housing market to leverage a house to near 100% of its appraised value have made foreclosure loans more difficult to qualify for. Although lenders may be willing to do short sales to help a client sell a house, it seems they are less likely to go for a short payoff, which would allow homeowners to refinance for a lower amount. However, short payoffs may become more acceptable as more properties fall into foreclosure and property values decline further.