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Mortgage Workouts
Lenders do not want to foreclose on a mortgage. Foreclosures cost more than can be made back, so lenders foreclose only as a way of limiting losses on a defaulted loan. If you do get behind on your payments, your lender or servicing company (the company that collects your payments) may be able work with you to bring the loan current. To do so, however, you must stay in communication with your lender/servicer and be honest about your financial situation.
Your lender’s willingness to help you may depend heavily on your past payment record. If you have made consistently timely payments and had no defaults, you should find the lender much more receptive than if you have a record of unexplained chronic late payments.
If you are falling behind in your payments, or know that you are likely to in the immediate future, contact the company that collects your payments right away about alternative payment arrangements. The servicing company will ask for information about your monthly income and expenses. Be sure to use realistic figures based on your current financial situation. The company will also need information on your assets and liabilities, including all debts and monthly payments and when they are due. If the servicer needs proof of income (pay stubs, unemployment check stubs, tax returns, etc.) the company will let you know. Remember, your lender/servicer does not want to foreclose.
An agreement between you and your lender or servicer to prevent the loss of your home is called a loan “workout plan.” It will have specific deadlines you must meet to avoid foreclosure, so it must be based on what you really can do to bring the loan up to date again.
The nature of the workout plan will depend on the seriousness of the default, your prospects for obtaining funds to end the default, whether your financial problems are short term or long term and the current value of your property.
If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting you “temporary indulgence,” a short period in which no payment is collected. An example of when this may be considered is a house that has been sold but the sale has not settled; another is a pending insurance settlement. The lender will want documented evidence, such as the sales contract, before granting indulgence.
If you suffered a temporary loss of income but can demonstrate that your income has returned to its previous levels, the lender or servicer may structure a “repayment plan.” This requires normal mortgage payments to be made as scheduled, along with an additional amount that will end the delinquency in no more than 12 to 24 months. In some cases, this additional amount may be a lump sum due at a specific date in the future. Repayment plans are probably the most frequently used type of agreement.
It may be impossible for you to make any payments at all for some time. If you have a good payment record with the lender, a “forbearance plan” will allow you to suspend payments or make reduced payments for a specified length of time. In most cases the length of the plan will not exceed 18 months and will stipulate the start of foreclosure action if you default on the agreement.
Workout plans represent a last-ditch effort by you and your lender to keep you in your home. They are not substitutes for good financial planning and likely will not be available if payment records are poor. Lenders will work closely with good borrowers who are having a period of real emergency and hardship but are not inclined to cooperate with those who demonstrate little financial discipline. Clearly, having a good payment record is important as is communicating with your lender at the first sign of trouble. Your lender or servicer wants to work with you. Anyone can have unexpected difficulties from time to time. Open communication with your lender can help avoid unnecessary complications.
This is a blog post for Real Estate Professionals, Investors, Landlord, Property Manager, and Property Management Companies. Mortgage Guide – Tips to Keep your Home in Financial Distress is brought to you by SimplifyEm Pay Rent Online and Property Management SoftwareYou might also want to read:
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