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A borrower in default means that he or she has failed to adhere to the terms of the loan agreement, and therefore a lender would have the legal right to enforce consequences for breach of contract.
Most lenders would view someone who has been delinquent for more than 90 days as being in default.
While the majority of home owners don’t default on their mortgages, banks are always prepared to follow systematic protocols when facing such customers.
The first thing a lender would do is to assess the situation and borrower to determine if the default is caused by a temporary financial problem or a permanent problem.
While a lender has a list of actions and responses which can be exercised, including foreclosure, that is the last thing they want to do as it takes time and resources to follow through with the process.
On top of that, it’s just not good branding to make a family homeless.
Temporary default or permanent default
So their preferred scenario is always that the borrower is just facing a temporary cash flow problem and a little time would be all it takes to have things revert to normal once again.
In this case, a forbearance agreement or a special repayment arrangement can be planned to help the borrower ride out his personal financial storm.
When it has been determined that the borrower is facing a permanent financial problem, then the bank would be focused on minimizing their losses.
At this point, foreclosure is still a last resort for most lenders as there are various alternatives that can help them keep losses at a minimum.
These alternative options include:
- Loan modification
- Workout assumption
- Short sale
- Loan modification
- Deed in lieu of foreclosure
Let’s look at what you can expect from each scenario.
A loan modification is exactly what it sounds like.
The lender changes the terms of the mortgage loan contract in order to make financial commitments of the borrower a little less taxing.
This can be a reduction in interest rates or an extension of the loan tenure.
Both feature changes would effectively reduce the monthly payment which the borrower would be obligated to repay according to the original terms of the contract.
It can also be a reduction in the outstanding balance or a change in the type of loan.
In any case, if the homeowner agrees to the new terms, the lender continues to keep the borrower as a customer while the homeowner gets to keep his house.
A workout assumption refers to the circumstance that can arise when there is a willing buyer of the property who would gladly assume the existing loan.
Even though this scenario is often something a lender is open to, there is usually to little time for the defaulter to find such a buyer.
In any case, if the buyer can find one, he would probably consider a…
A short sales refer to putting up the property for sale at a discounted price.
The sales proceeds will the be paid to the lender, and be considered as full repayment of the loan remaining.
This is even when the sales proceeds are well short of the debt owed.
Deed in lieu of foreclosure
If all the previous steps to avoid foreclosure fail, then the final throw of the dice would be to convince the homeowner to give up title to the lender and be released from the debt.
This type of action is called a deed in lieu of foreclosure.
Things you can do to avoid the wrath of lenders
You can bet that a lender would be unhappy with defaults.
Yet they are in a tricky situation that balances between keeping a customer or making a loss.
Before actually going into default, a borrower should already start making preparations for a showdown with the bank.
If the lender can be convinced that the borrower’s adverse financial situation is a temporary one, then there is every chance that they might provide payment relief for up to 6 months to see how it turns out before taking any serious action on the defaulter.
Some important information that could sway their opinion is when:
- the loss or reduction of the borrower’s personal income is involuntary and would change for the better soon
- there is a lot of equity in the property
- there are other avenues of income that would be coming soon
It’s always good to have considerable equity in the property as the lender would know that there is enough money in the house to settle the debt, or most of it.
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