Understanding the different options a seller may be considering is important when negotiating. Below are 10 of the most common options to address with sellers in default or anticipating being in default.
1. Reinstatement of Loan (Cure): Paying the lender everything that is owed in one lump sum including missed payments, any late fees associated with these payments, foreclosure fees, legal fees and the principal owed during the delinquency. A cure may involve the seller curing or deeding it to the investor “subject to” the existing loans, and the investor will then cure. Risk to the seller includes that the lender may accelerate the loan because of the due-on-sale clause, the seller no longer owns the property and the seller has no recourse if the investor doesn’t pay the loans.
2. Repayment Plan: A written agreement between the lender and the homeowner. These plans require higher payments than the regular monthly mortgage amount for a period of time until the loan is brought up-to-date.
3. Loan Modification: Involves changing one or more terms of a mortgage. Modifications may be considered to reduce the interest rate of the mortgage, change the mortgage product (i.e., from an adjustable rate to a fixed rate), extend the term of the mortgage or capitalize delinquent payments (add delinquent payments to the mortgage balance-only available in extreme hardship situations). Modifications are NOT easily granted and there must be strong, justifiable reasons for the request.
4. Forbearance Agreement: Lender allows a period of time (typically 3-6 months) of either low payments or no payments at all. Unless the loan term is extended (rare), the later payments generally have to be higher than the original monthly mortgage payments until the loan is up-to-date.
5. Special Forbearance (FHA Loans only): Allows eligible borrowers to postpone monthly mortgage payments for a minimum of four months. While there is no limit on the maximum number of months, at no time may the agreement allow the delinquency to exceed the equivalent of 12 monthly PITI installments. (principle, interest, taxes, insurance)
6. Deed-in-Lieu: The borrower voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL may not be accepted from borrowers who are financially able to make their payments. If a borrower qualifies for a DIL program they may be eligible for cash back from the lender as in the “Cash for Keys” program.
7. Cash Sale: The borrower sells the property, pays off his loan, and, depending on the equity, may net some cash out of the deal. The challenge, of course, is being able to sell it quickly enough which most often requires a substantial drop in the price.
8. Short Sale: The borrower makes an agreement with the investor to sell it for less than is actually owed subject to approval of the lien holders. This generally results in no cash to the homeowner, but will be better for his credit than a completed foreclosure.
9. Refinance: Getting a new loan. This is generally difficult because the borrower has little equity and poor credit. Any new loan likely will have higher payments than the old loan.
10. Do Nothing: The worst choice for the seller, whose credit will be ruined, but he can stay in the house for several months for nothing, save up some cash and move when the lender or the high auction bidder eventually evicts the homeowner.
When negotiating, explain each of these choices honestly with the homeowner. You may lose a deal or two by offering the homeowner choices that are actually BETTER than your offer, but that’s fine – always take the high road and you will have a long and prosperous business in real estate investing.
