The last thing someone who buys a real estate mortgage note or owner-finances a home wants is for the borrower to stop making payments.

Most borrowers make their payments on time year after year. Unfortunately, some borrowers get behind on payments and need time to catch up. Occasionally, a borrower will stop paying altogether and either just walk away from the property or, worse yet, stay put and see how long the free ride will last.

Important: It’s very important that anyone planning to contact a borrower about a delinquent debt understand and follow the myriad of debt collection laws in this country. These requirements have become increasingly onerous to lenders since the 2008 housing crisis. It is wise to leave borrower outreach and legal matters to the professionals. Your third-party loan servicer should be the first line of defense should you have to address a non-payment issue with borrowers.

With that said, you do have options when confronted with a problem payer. Your success in getting them back on track (or recovering your investment) can be enhanced by giving proper attention to a few important matters.

1. Stay In Touch

Life happens to us all. Your borrower may have honorable intentions to fulfill their promise to pay but, due to unforeseen circumstances, is unable to meet their obligations. When this happens, the first thing to remember is to open and keep a clear line of communications with the payer. Your loan servicer is your best asset in making this happen.

Some lenders try and play ‘hard ball’ with the payer right from the outset. While a strong-arm approach may be appropriate for some payers, it really isn’t the best place to start since it is likely to put the payer on the defensive. And someone in an adversarial mode is not likely to answer or return calls from you or your servicer.

A better approach might be to let the payer know you understand that life comes with challenges and you are willing to work with them to help get things back on track. Make sure they know that your goal is for them to stay in the home if that’s the best option. Certainly, they should be reminded about any late fees or penalties but, again, you are here to help them.

Quite often payers will be able to resolve the payment issues in a few months.

2. Sell the Note

Some lenders simply don’t want to deal with payer problems. No judgment. That’s just the way it is.

Holding notes is most likely not your main business, and you are most certainly not in the business of collecting delinquent debts. Because of this, it makes perfect sense that you would just sell the note to avoid the hassle.

Don’t think that because the note is having payment problems nobody is going to want to buy it. There are many investors who specialize in buying delinquent notes. Be sure to fully disclose the current situation to the investor up front (e.g., missing payments, late fees). You can be certain that these details will eventually come out in the due diligence phase.

It typically costs nothing to obtain a note appraisal, and you should be under no obligation to sell the note if you’re not satisfied with the offer amount.

3. Consider Offering a Deed In Lieu of Foreclosure

At some point a prudent note holder must decide to remove the delinquent borrower and take back the property so it can be sold again to a reliable payer.

The typical process for removing a delinquent homeowner is foreclosure, however, this process can often be lengthy and expensive depending on the state and other circumstances.

An alternate strategy is to offer the payer a “Deed in Lieu of Foreclosure.” This can be an especially effective strategy when the payer is cooperative and realizes they simply can no longer afford their mortgage.

With a deed in lieu, the homeowner simply deeds the property back to the lender without going through the foreclosure process. The lender will sometimes offer the payer a monetary incentive to accept the deed in lieu agreement and to vacate the property within a certain time period. The payer also benefits greatly by avoiding the negative credit consequences that accompany a foreclosure.

This often-overlooked strategy is a great way to help a note holder minimize the ongoing loss of revenue.

Important Note: Note holders should be careful to check that the property’s title is clear before accepting a deed in lieu since they may become liable for any liens and judgments recorded since the property was originally sold to the payer. It is recommended that a qualified attorney be engaged to assist with the deed in lieu process.

4. Modify the Note Terms

When you see a genuine desire and willingness on the part of the borrower to get back on track, you might consider modifying the terms of the original note in an attempt to create a new payment plan that works for both parties going forward.

One common adjustment is to move the delinquent amount (payments, late fees, collection costs) to the end of the loan, extending the maturity date accordingly. This approach is well-suited to borrowers who’ve had a temporary setback and are now fully back on track (e.g., a temporary job loss).

Such a modification should be accompanied by “proof” from the payer of the hardship. Additionally, we recommend that a Trial Payment Plan (TPP) be undertaken which insures that the borrower is truly back on track before the modification becomes official. For example, the TPP might require 6 months of on-time payments before the modification agreement takes effect.

Creativity can be used when crafting note modifications. For example, the interest rate can be lowered, the payments adjusted, or the term extended to accomplish the desired result. It might even make sense to forgive some principal in exchange for improvements made to the property.

Tip: We recommend using a real estate attorney to draft the TPP and loan modification documents. It’s critical that modifications are handled in such a way that the existing lien position of the note is maintained.

Getting a Delinquent Note Back on Track

It’s never a good thing when a loan goes delinquent. However, a dose of understanding, some reasonable tolerance, a little creativity, and open lines of communication just might resolve the bad situation and return the note to performing status.

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