When a borrower fails to adhere to the payment terms of the loan agreement, it is considered a default.
Even though people in general think that a monthly payment that is not paid before the due date is a default, lenders seldom view it that way as there are more serious implications when they classify a loan as one being in default.
A payment that is overdue can be viewed as:
- Late payment
In practice, lenders usually only view delinquency of over 90 days as being in default.
During which, they would advise the borrower to make the payments.
If a homeowner is still unable to pay outstanding payments, then there is a real possibility of foreclosure proceedings commencing.
What the lender is thinking
Despite what many people feel about how evil lenders are when it comes to foreclosing them, foreclosure is actually the last thing a lender wishes to do.
This is because foreclose can be a lengthy tedious process. And there is no guarantee that the lender will emerge better off than it’s position before foreclosure.
Moreover, forcing people out of their homes is just bad branding.
Should it be determined that the borrower’s financial woes are of a short term nature, the lender might propose a forbearance agreement.
This gives the borrower a certain period of time (maybe 6 months) where he either don’t need to make repayments or has to make a much smaller manageable payment amount.
After this period, either the loan reverts back to the original amortization schedule with an extended term equaling the forbearance period, or a special repayment plan is created whereby the borrower makes the regular payments plus a little extra to make up for the “missing” payments.
The period of the special repayment plan can vary but usually last no longer than a year.
There is also the possibility of the mortgage being recast.
Should it be determined that the borrower’s dire financial situation is a permanent problem, then the lender’s plan goes into overdrive to minimize loss.
One such method is loan modification.
This can totally restructure the mortgage with new interest rates, new terms, and new conditions. A combination of them is the most common.
Another way the lender might attempt in order to get out of the sticky situation is to let the borrower to find a buyer for his house and allow the new owner assume the mortgage.
This is called a workout assumption and it enables the lender to secure a new borrower to takeover the loan obligations.
However, to prevent coming back to the same situation of default, the lender would run a credit assessment test to qualify the new borrower.
If that’s not possible, there is still the option of working out a short sale agreement with the defaulting borrower.
This means that the lender would allow the borrow to sell the property in the open market and accept the sales proceeds as full repayment of the loan, even if the net proceeds are less than the balance outstanding.
If nothing comes to fruition, the final play before actual foreclosure is to consider convincing the borrower to give the title of the house to the lender as full repayment for the debt.
This action is called a deed in lieu of foreclosure.
When all else fails, the legal process of foreclosure begins.