What should I do when my Borrower stops paying?

 

So, your borrower has been paying timely for years, but then one day the payments stop!  What should I do now?   While this may never happen to you, having a plan of action on what you will do is critical to the overall success of your investment!

There are several standard options to pursue when a borrower stops paying.  When a borrower is paying, everything is great!  However, when they stop paying, it is important to be ready with a plan of action!

Listed below are some traditional options on how to address non-paying borrowers.  You should be familiar with the list and prepare your own plan of action when your borrower stops paying.     

1. Communications – Once a borrower misses a payment, the most effective collection strategy is a simple call or visit to determine what is going on. Once you understand the borrower situation, you may be able to determine a fair solution.
2. Forbearance – If the borrower is in tight spot (ie healthcare bills, loss of job etc), a forbearance is a good option. With a forbearance, you will allow the borrower to miss a set number of payments today but will attach the missed payments to the end of the loan.  All remaining terms will remain the same, just the final payment date is pushed out.
3. Modification – Another option for a borrower in a tight spot is a loan modification. In this case, the terms of the loan are adjusted to better meet the borrower situation.   For example, payment amounts may be decreased due to loss of a 2^nd  In this case, you will help the borrower in their time of need, and you will increase your length of repayment.   You can modify any of the terms of the original loan as long as both parties agree.    
4. Cash for Keys – When the first 3 options do not work, another option is cash for keys. In this case, you will pay the borrower an agreed amount for them to sign the home back to you and vacate the property in good condition.  While you lose your monthly payments, you will get the home back and be able to find a new borrower.
5. Demand Letter – This is a formal letter sent to the borrower demanding full repayment immediately. If the borrower responds, you will then have the option to find a solution, getting repayment or moving to the final option, foreclosure.  
6. Foreclosure – This is normally the final option for non-paying, non-communicating borrowers. This is expensive and can take a while (from 3 to 18 months depending on your state).  The result is you get the home back and the borrower’s credit will be negatively affected.  This should only be done as a last resort and you should always work with your legal experts.

Summary

When borrowers stop paying, it is critical for you to have a plan of action.  Communication is key and often can resolve issues quickly.  When communication fails, there are several options available to you that can help the borrower to get back on track and paying on time.   And as a last resort, foreclosure will get the home back.  

Throughout this process, there are a lot of steps that are required.  If you are using a third-party servicer, they can normally assist and will be able to provide next steps.  Another important asset for you will be an attorney that can assist in creating any necessary documentation or pursue legal actions.

Connect with Peak Notes Why not set up a meeting with a Peak Notes specialist to discuss how to work through a situation where your borrower is not paying! Meetings are brief, cost nothing and can give you more insight into how you can maximize your investment potential! If your property is located in Florida, please click on this link and set up a meeting with John.          Meeting with John     If your property is located outside of Florida, please click on this link and set up a meeting with Karen.      Meeting with Karen