If you’re behind on mortgage payments, it can be confusing trying to determine which home retention option is right for you.
Because you can’t rely on your mortgage lender to explain things to you, it is important to be informed about your options before you apply for loss mitigation with your servicer.
(Read about the challenges borrowers face when trying to get current on their payments)
One home retention option available to you is called a repayment plan.
What is a repayment plan?
A repayment plan allows you to resume your regular mortgage payment each month while paying an extra amount of money in addition to your mortgage payment. The extra amount of money you pay each month goes toward the arrears (your missed mortgage payments).
At the end of your repayment plan, you have paid back all your missed mortgage payments and you simply move forward making your regular mortgage payment each month.
How is a repayment plan different from a loan modification?
A repayment plan is NOT a loan modification.
- A repayment plan does not give you a new loan with new terms: Unlike a modification, a repayment plan is an agreement between you and your mortgage servicer to pay back what you owe and resume making payments under your original mortgage.
- A loan modification gives you a new loan, with new terms: A loan modification is a new agreement that restructures your mortgage. Instead of paying an extra amount each month toward your arrears, a modification will often move the arrears to become due at the end of a new loan. Your modification will often provide you a new maturity date, a new interest rate and a new payment. Loan modifications allow you to resume a regular mortgage payment without having to pay extra toward your arrears.
(Read my complete guide to loan modifications)
How is a repayment plan different from a refinance?
A refinance refers to a situation where you are:
- Current on your mortgage payments and choose to
- Have a new lender buy your existing mortgage to give you better terms
It is very hard (if not impossible) to complete a refinance while you’re in default on your mortgage. Refinancing lenders require a recent payment history in order to complete a traditional refinance.
So, when you’re in default, you likely can’t produce the recent payment history needed to refinance until the default is resolved.
A repayment plan (unlike a refinance) is a way to resolve the default issue.
If your ultimate goal is to refinance and you are behind on mortgage payments, you need to resolve the default first (through a repayment plan or loan modification or reinstatement etc.). Then, once you have a recent payment history showing regular mortgage payments, you can refinance your loan.
How do I apply for a repayment plan?
Many people assume that they can just start paying their mortgage when they’re ready and include “a little bit extra” each month until they’ve paid the bank back.
Unfortunately, repayment plans don’t work like this. Your mortgage lender has to agree, in writing, to allow you to enter into a repayment plan with them. They will tell you the amount of your payments and the term of your repayment plan.
To apply, you need to send in:
- Your lender’s loss mitigation application
- A hardship letter
- Supporting financial documents
Your mortgage servicer will review your financials to determine if you qualify for a repayment plan.
Did you apply for a loan modification but get approved for a repayment plan?
The application process for a loan modification and a repayment plan is the same. Sometimes, people apply wanting a loan modification but end up receiving approval for a repayment plan.
If this has happened to you, it means that you showed the mortgage servicer a high surplus of left over income at the end of every month.
The way that you presented your debt to income ratios made it look like you have a lot of money left over every month after you’ve covered all your expenses.
When the mortgage lender sees this surplus, they assume that it is affordable for you to resume your regular mortgage payment and pay extra each month.
Because repayment plans pay the banks back faster, they will always try to slot you into a repayment plan over a loan modification if it looks like your household can afford the payments.
If this has happened to you and you can’t afford the repayment option you were approved for, you can appeal the decision within 30-days of receiving the repayment plan approval.
Your appeal should address one (or more) of the following things:
- The lender miscalculated your income and it’s actually lower than what they used to approve your repayment plan
- The lender miscalculated or omitted some of your reported expenses, making it look like you had more money left over at the end of each month than you actually have
- New expenses have popped up for your household since you were evaluated for the modification that need to be added to your total expense sheet
- You did not show them all of your expenses, so the lender’s understanding of your expenses is not accurate
- There is some element of your financial situation that wasn’t made clear to the mortgage servicer. This element makes it impossible for you to support the payments they want under the repayment plan.
If you’re going to appeal your repayment plan, make sure you attach supporting documentation for your appeal reason.
I also suggest filling out a new expense sheet if you are claiming an issue related to your expenses. It is always helpful to provide them with a correct, full version of your household expenses to help them re-run the review.
(Read this guide on how present your income and expenses for a loan modification)
How do I determine if a repayment plan is right for me?
A repayment plan may be right for you if:
- Your income has recovered substantially and you have a large surplus of income left over at the end of every month after factoring in your mortgage payment
- You won’t qualify for a loan modification because you’ve exceeded the number of modifications you can have under your investor’s guidelines
- You have a private investor who doesn’t offer loan modifications
- You don’t want a loan modification with new terms. You want to just get current on your existing mortgage as fast as possible, even if the payments are high.
How long do repayment plans last?
It is rare for mortgage lenders to offer a repayment plan option for longer than one year (not impossible, but rare).
What this means is, you are likely going to be asked to pay back the entirety of your arrears in 12 months or less (on top of your existing mortgage payment).
The short terms of repayment plans often create a monthly payment that is close to double the existing mortgage payment which is why repayment plans often can be unaffordable.
If you are a Washington state homeowner who is behind on your mortgage and considering applying for a repayment plan or have questions about how to ensure you avoid being approved for an unaffordable repayment plan, feel free to reach out for help at (425) 654-1674.