A Borrower’s Action Plan When Facing Payment Problems

No self-respecting adult would walk into a mortgage fully knowing that he will not be able to meet it’s debt obligations over the short or long term.

But ever so often, people run into financial trouble for one reason or another.

What’s shocking is that many people choose to do nothing even when they can see a personal financial storm brewing over the horizon, getting ever so close with each passing day.

In my opinion that’s an irresponsible decision to make.

Anyone who has willingly signed up for a loan, whether a mortgage or otherwise, should repay it. And when problems come up, they should confront the issue head-on so that life don’t push them around like a bully to a freshmen at senior high.

Whether you are in delinquency or worse, in default, or have yet to get there but see it heading towards you like a truck, the smart thing to do is to plan your next move and prepare for a face-off with your lender.

You actually have an advantage for acting early as the lender has no idea what is about to hit them.

Here are some things you should put into consideration when formulating your action plan.

Documentation

The first task in your playbook should be to document:

  1. The good things
  2. The bad things in good light

These will serve as your ammunition when you eventually gets in touch with the bank.

The stuff your should document include:

  • Letter of financial hardship
  • Copies of outstanding bills and late notices
  • Real estate data showing bad or slow movement of property values in the area
  • Pictures of home in bad shape in dire need of repairs
  • Pictures of neighborhood showing how bad the real estate market is
  • Personal financial records including tax statements other income
  • Proof of unique events that affect your finances like divorce, medical bills, and retrenchment
  • Proof of bad tenants playing punk with rental payments
  • Proof of assets including the equity in the house
  • etc

With the above examples, you should have a good idea of the types of documentation I’m referring to.

The critical factor is not to lie.

In other words what ever facts you present must be the truth. But whether it’s the whole truth is up to interpretation.

Should you be able to show strong substantial evidence that your financial problems are temporary, the conditions might be just nice for the lender to offer a forbearance agreement.

High equity

When there is substantial equity accumulated in the house, the prospect of foreclosure can be very tempting to the lender.

This is because they can be sure that they would be able to get all their money back as long as they are willing to go through the trouble of dragging you through the mud.

However, it would be a homeowner’s nightmare.

Not only will they lose their homes, their credit will be hammered which can affect all applications of loan and credit facilities in the future.

The only silver lining is that should the auction close with no surprises, the proceeds that exceed the loan balance outstanding will be pocketed by the borrower.

But that will most likely be pocket change when you consider that he has to find a new house.

So if a borrower is somehow able to convince lender of his financial troubles being just a temporary problem, it would be much easier for the lender to agree to a loan modification or a forbearance agreement.

On the other hand, if the lender deems the financial troubles as a permanent problem, foreclosure is almost a certainty.

Otherwise, drastic measures has to be taken or the borrower faces having his credit vaporized by stacking delinquencies.

The house has to be sold as soon as possible.

This way the homeowner still has a good chance of dealing with buyers who still haven’t gotten wind of a coming foreclosure that could raise their negotiating position.

Not forgetting that it saves their credit record from getting mangled.

However, if a borrower has yet to enter the stage of delinquency, short term respite is on hand.

A home equity loan, second mortgage, or HELOC can help the borrower buy some time by using the funds generated from these facilities to pay for the monthly debt obligations.

However, surely you must know that if you fail to resolve your financial problems soon, these actions will just bury you deeper into debt and liability problems.

So they are only recommended if the borrower is convinced that the sun would rise again very soon.

Little to no equity

The game changes radically when there is little to no equity in the house.

However, this becomes a showdown of who-blinks-first.

This is because even though a lender knows that it has the legal right to foreclose the property, there is little point in doing so as sales proceeds might only pay a fraction of what is owed.

Counter-intuitive to what most people think, having very little stake in the house actually gives a defaulter more bargaining power over the lender.

If the lender deems the financial trouble of the borrower is temporary, there is a very good chance of a forbearance agreement being reached, and even payment relief being offered.

This is also a very likely outcome if it is determined to be permanent but not catastrophic.

But when the lender decides that all hope is lost, to minimize loss and waste of resources since there is very little equity, in an effort to avoid foreclosure a lender should be receptive to short sale proposals or a deed in lieu of foreclosure.

Both courses of action will in the settlement of the mortgage in default.

Final words

Remember that banks are not in the foreclosure business. They are in the lending business.

They make money from charging interest rates to borrowers.

And while they have the right to foreclose a home from a defaulter, that is the last thing they want to do.

So if a borrower is facing financial difficulties, there is a very high likelihood that they would agree to compromise on the debt obligations as long as they are convinced that the borrower’s financial problems will recover with a little bit of their support.