A balloon payment is a large payment due at the end of a mortgage's repayment term. It is most common with second mortgages, especially home equity lines of credit, although primary mortgages sometimes have balloon payments as well. Most buyers required to make a balloon payment expect to refinance the loan before the payment is due. If you can't refinance and you can't make the full payment, you have a few options.
Refinance with Cosigner
If you cannot refinance because your credit is not good enough to qualify or your income is not high enough to support the monthly payments, ask a friend or relative to cosign the loan for you. This person must have good credit and a low debt-to-income ratio so he can meet the lender's standards that you failed to meet. In addition, this person must be willing to sign the agreement to repay the mortgage if you fail to make the required payments.
Sell the House
If you can sell your home and get enough money to pay off all mortgages against it, including the one with the balloon payment, this could keep you from damaging your credit. Talk to a real estate agent about listing your house at a price that will sell quickly, and have a short escrow period so the sale goes through before your balloon payment is due. Selling your house might not be your preferred choice, but if you can pay off your debts in full, this may be a better alternative than foreclosure.
When you can't refinance and can't sell your house for enough money to pay off your debt, the last option is to allow the bank to foreclose. In foreclosure, the bank takes back possession of your home, sells it and uses the proceeds to pay off as much of your loan as possible. Foreclosure will lower your credit score for up to seven years. The bank can also pursue you for repayment of any debt that goes unpaid.
If you have not yet obtained the mortgage with a balloon payment, reconsider whether this is an appropriate choice for you. If your home value drops or your credit score drops, you might not be able to refinance and you could suffer serious financial setback. Consider a mortgage that spreads out the payments over a long period, but doesn't require a balloon payment at the end.