If you’re behind on mortgage payments, you’re likely trying to understand all the different options available to you.
A repayment plan is one option that can help resolve the default without having to pay everything you missed at one time.
What is a repayment plan?
A repayment plan is an agreement you make with your mortgage lender to resume regular mortgage payments AND pay an extra amount each month (on top of your existing mortgage payment) until you have paid back all your missed payments.
A repayment plan is an agreement that must be negotiated and approved in writing by your mortgage lender.
How is a repayment plan different from a loan modification?
- A repayment plan doesn’t create a new loan or change the terms of the original loan (a loan modification does)
- Repayment plans often have much higher monthly payments than loan modification payments
How is it different from a refinance?
Technically, a repayment plan is a type of refinance; however, the term “refinance” usually refers to restructuring of a loan that is current.
A “repayment plan” is a loss mitigation option for homeowners who are missing mortgage payments.
It can be difficult (if not impossible) to complete a traditional refinance when you’re in default because new lenders need a recent payment history in order to complete the refinance. If you’re behind on payments, you don’t have a recent payment history.
So, if you’re in default, you need to resolve the default using a loss mitigation option (like a repayment plan or a loan modification) before you’ll be able to refinance.
What can you expect the terms to look like?
- You can expect the payments to be high (sometimes, almost a double mortgage payment)
- You can expect the term of the repayment plan to be short (less than 12 months, usually around 6 months)
- You can expect your repayment plan to start right away (within a month of you asking for one)
Why would someone choose to do a repayment plan instead of a loan modification?
Most people who are missing mortgage payments prefer a loan modification over a repayment plan because the monthly payment is more affordable.
Repayment plans often result in high (almost double) mortgage payments, as the banks want their arrears paid back as soon as possible in the shortest amount of time.
Loan modifications often lower the interest rate on your mortgage and extend the term of the loan so you can resume a payment very similar to (or lower than) your original payment.
Here are the reasons why you would end up (or choose) a repayment plan instead of a loan modification:
- You have plenty of funds to make a high monthly payment and you want to pay back your arrears as fast as possible.
- You don’t qualify for a loan modification. Either your investor does not offer a loan modification or you’ve exceeded the number of allowed loan modifications and a repayment plan is the only option to keep the home other than a mortgage reinstatement.
Why do banks offer repayment plans first before loan modification?
Repayment plans are the mortgage lender’s preferred loss mitigation option because it gets them paid back in the fastest amount of time and they have to do the least amount of work to prepare an offer for you.
When you apply for a loss mitigation option like a repayment plan, lenders are allowed to review you under a “waterfall process.”
The waterfall process allows the lenders to review your financial information to see if you can afford an option that would be most beneficial to them first (even if it’s not what you asked for).
If it looks like your income can support a repayment plan, even if you asked for a loan modification, they will try to get you to take a repayment plan first.
If you sent in the required document package and application for a loan modification and ended up being offered a repayment plan, this means that your application showed a large surplus of income left over at the end of every month.
When you show a large surplus of income, the bank stops the waterfall process at the top of the waterfall, believes that you can afford a high repayment plan and tries to make you an offer that sucks up your surplus income and gives it to the lender.
If this has happened to you, you may have to submit an appeal of your repayment plan approval and show the lender more expenses to the household.
If you’re going to do this, I would recommend getting help from a professional at this point.
What happens after your repayment plan is over?
After the repayment plan is over, you are considered to have gotten current on your original mortgage.
The terms of your mortgage that were in place prior to the repayment plan are still in place and you simply move forward making regular payments.
Any foreclosure activity attached to your account will be stopped as soon as you complete your repayment plan.
What are my options if I don’t want a repayment plan?
Repayment plans are not for everyone. There are many other loss mitigation options that can help you resolve the default and avoid foreclosure.
Mortgage relief options for Washington homeowners
Mortgage issues are complex. Banks and mortgage servicers can be very uncooperative. If you think you might need some help, you have some good options. Here are three articles to help you understand the help that is available to you.
What Can a Mortgage Attorney Do For You
What to Look For In a Loan Modification Attorney
What Can a Foreclosure Attorney Do For You
If you’re a Washington homeowner and would like to discuss your situation, please give me a call at (425) 654-1674.