How to Work Out Terms With Your Lender
When you hear the term “workout,” your mind might immediately jump to your gym routine. In fact, in the terms of a mortgage, “working out” with your lender takes on an entirely new meaning. A loan workout is a way to come to a workout agreement, an agreement between a lender and a borrower on renegotiated terms on a defaulted loan.
A workout agreement helps borrowers avoid foreclosure, but the process itself isn’t always straightforward. You might also hear it referred to as a loan modification or a mortgage modification. However, because both parties need to come to an agreement, it can become quite complicated.
Whether you’re worried foreclosure might be on the horizon or you’re preparing to work out mortgage terms with your lender, this guide is for you. We’ll go step-by-step through what you need to do to work out your terms with your loan provider.
Why Negotiate Your Terms?
First, let’s identify why you might need this option in the first place. While there might be other ways to get out from under your mortgage to avoid foreclosure, it’s usually best to simply work with your lender. We can all agree that a loan workout is a better plan of action than a foreclosure.
The home foreclosure process will not only leave you without your home, but it will also do a number on your credit score. You need to take as much action as you can to prevent this kind of damage to your finances.
How to Negotiate a Mortgage Workout
If you’ve decided it’s time to work out your terms with your lender, don’t delay. The sooner you take action, the more options you’ll have for coming to an agreement that works for both the lender and yourself. Follow these steps below.
Step 1: Get in Touch with Your Lender
The first step, of course, is to quickly get in touch with your lender. As we mentioned before, you want to do this as soon as you know you’re no longer able to make full payments on your mortgage.
Don’t wait until you’ve already stopped making payments, because this will send your mortgage into default. You’ll have the most options by talking to your lender before you reach default.
Step 2: Provide Your Lender with Documentation
Next, your lender is going to ask for documentation. They need to understand why you’re no longer able to pay the loan, and they also need to know whether you’ll be able to continue paying in the future. Many times you need to prove some kind of “hardship,” such as a lost job, death of a spouse, and so on that is impacting your ability to pay.
Here are a few of the things the lender will be looking for:
- What type of hardship has led to the homeowner’s inability to pay their loan
- How much is still owed on the loan
- How much equity does the property have already
- Does the homeowner have a steady source of income or other assets
From there, the lender will likely decide whether a loan workout or a foreclosure is the best option for the lender. Foreclosures are costly for both parties, so many lenders are willing to work with you to get you through these hard times.
Step 3: Discover the Types of Loan Modifications
After you submit your documentation and proven your hardship, you’ll likely be presented with renegotiation options. You might even have wiggle room to propose your own solution if you think there’s a workout that would work best for your situation. Here are the usual types of workouts lenders offer to those who qualify:
- Forebareance – Forebarenace is when you’re allowed to skip or reduce your number of monthly payments for a specific period of time.
- Term extension – Many lenders will offer a longer loan term which will reduce your monthly payment though it will also add more interest to the life of your loan.
- Lower APR – Your lender might permanently or temporarily lower your annual percentage rate (APR) which affects your monthly payment.
- Alternative payment schedule – Finally, you might be able to propose an alternative schedule depending on your ability to pay.
Settling in one of these ways above is still likely to impact your credit score, but it will be much less severe than a bankruptcy, short sale, or foreclosure.
Step 4: Make a Decision
Finally, it’s time to make a decision. If you do reach an agreement on your new loan terms, be sure to get this agreement in writing. It’s smart to keep written copies of all correspondence with your lender. You’ll need to come to a decision about which workout option is best for you if any is at all.
Ultimately, a loan workout is a common way to get out from under a failing loan. If you’re unable to make payments on your mortgage, you have options. A loan workout gives you the chance to alter the terms of your mortgage so you can gain back control over your payments without risking foreclosure.