Proficient Note Buyers
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June 14, 2010
Disability Dilemma
A friend of ours spent last weekend with us while attending a convention here in Spokane. During one of our conversations, she mentioned she was anxious about her home loan ballooning in September. The problem? She has been on short-term disability from her flight attendant position due to an injury she suffered at work.

For those of you unfamiliar with the term, a 'balloon' requires the borrower to pay in full all that is owed on a mortgage. In my friend's situation, she took out a 7-year balloon note when she refinanced her house. Back then, she figured she'd be retired by the time the loan matured, and she'd sell the house and move on to the next stage of her life.

Well, we all know God laughs when we make plans. The 'Great Recession' will keep her working for several more years, and she's not ready to sell her house. She has spoken to several lenders about refinancing, but the same issue keeps popping up. No, it's not that she's underwater - in fact, her house is worth about three times as much as her mortgage, so she's fine from an equity position. The problem is that her disability income is insufficient to satisfy the lenders' debt-to-income ratios.

Now, she has savings and can make her payments, but the lenders won't use her 'usual' income for qualifying purposes until she's back to work. She doesn't think her doctor will give her medical clearance until after the balloon comes due. She asked for my advice, and here's the gameplan I gave her:

Even though her current lender has offered to refinance her, they want to frontload it with costs, including a new title policy, which will run her about $1,500. I informed her that was a waste - instead, she should ask them for an extension of the balloon, taking into consideration her short-term hardship. An extension doesn't require a new title policy or any of the other costs involved with a refinance. An extension would also keep her from falling into 'defaulted' status when the balloon date passes. From the lender's perspective, a six-month or one-year extension keeps our friend paying the mortgage, and still doesn't obligate the lender to a long-term 'fix'. When our friend resumes working, she can then pursue a refinance (with her lender or someone else) while she's earning her full salary.

She was going to call her lender late last week to discuss her options, so I don't know the resolution as yet. For anyone reading this who might encounter a similar situation, my advice is this: Try to work something out with your current lender. They just want performing notes - trust me when I say they have FAR TOO MANY other problems to deal with to put up much resistance. If you can offer a solution that is mutually beneficial, they might just take you up on it so they can focus on the bigger fish in their fryers.

Make it a great week,

Clint


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