A balloon mortgage -- a short-term loan with long-term payments -- seems like a good idea until the time comes to pay it off. Balloon loans are tailored toward borrowers who plan to sell the property or refinance before the end of the term. Let's say a lender offers you a five-year term with a 30-year amortization. You make payments on a schedule that would pay off the loan in 30 years. However, after five years, you must pay the remaining balance in full. The likelihood of getting your balloon payment reset will depend on your credit, your ability to qualify going forward and your history and relationship with your lender.
Begin the process well in advance of the balloon payment, at least six to nine months. The reset can take time, and you don't want to press up against your maturity date. Once the balloon payment is due, late charges are assessed after 10 to 15 days of nonpayment. The large balance owed will make these charges significant.
Review your original promissory note. If you don't have a copy, request one from the lender. Check to see if it carries a clause for an automatic reset. If it does, it is typically conditioned on keeping the loan current with no default triggers, such as unpaid property taxes.
Keep your loan current. You should do this regardless, but if you want to have a chance to reset the balloon payment, you will need to show strong repayment history. Many balloon contracts indicate that the lender is under no obligation to reset a balloon loan if you've been late at any time in the past 12 months.
Obtain a copy of your credit report from the government's annual credit report website. You are entitled to one free copy each year. Review the report and make sure it is free of errors. If discrepancies exist, contact the credit bureau and clear the item in question. This can take 30 to 60 days, so make sure you budget enough time. If you have a low credit score and delinquency on your report, the lender will not reset the loan, requiring you to either pay the balance in full or seek financing elsewhere.
Contact your lender to get information on the reset process. If your note contains a provision to reset the loan, find out how to exercise that option. If no reset language exists, find out what paperwork and information are needed to begin the process. If possible, speak to the loan representative who helped you initially. The familiarity will help the process along.
Complete a loan application and submit your financial statements: two years of W-2 forms and federal tax returns and one month of pay stubs. If the note has a reset clause, the lender may only look at your credit and review your payment history. If not, it will underwrite the loan in the same way it handles a refinance. The lender needs to ensure that you can still make the payments and that your property has the same value it did at the beginning of the loan.
Indicate on the application whether you are applying to extend to another balloon period or if you want to fully amortize the loan. For example, if your initial loan was a five-year balloon based on a 30-year amortization schedule, you can extend it an additional five years on a 25-year amortization schedule or request to extend the loan over the full 25 years.
Sign the documents once the reset is approved. Depending on the lender and the terms of the original balloon note, you will sign an entirely new set of loan documents or a simple modification that extends the maturity date.
- If legitimate delinquencies appear on your credit report, provide a detailed written explanation to the lender. Say why the delinquency occurred and how your finances have improved since then.
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