In the world of finance, loan terms such as performing, non-performing, and sub-performing are often challenging to understand. In this blog, American Equity Funding will define and explain each of these types of loans and the various strategies used to service them.
A performing loan is a loan that is paid back on time and in full by the borrower. This type of loan is usually straightforward and often considered ‘mailbox money’ (passive income) by the lender because of the minimal risk and safe investment. The borrower meets all the terms agreed upon, such as interest rate, principal amount, and payment schedule.
A sub-performing loan is a loan where the borrower only makes partial payments or does not meet the repayment schedule. This type of loan carries a higher risk level than a performing loan because the borrower may not meet obligations and therefore, the lender may not receive the expected return on the investment.
A non-performing loan is one on which the borrower has defaulted on payments. Defaulting means the borrower has missed some or all monthly payments and cannot pay off the loan. This often requires the lender to take legal action to recover funds and poses the highest liability.
On a performing loan, the lender continually monitors the creditworthiness of the borrower to ensure the agreed repayment plan. In the event of missed payments, the lender contacts the borrower to help in meeting obligations.
A sub-performing loan involves a more proactive and nuanced strategy. The lender may offer various payment options to the borrower, allowing for flexible repayment terms. These can include creating a budget, interest rate reductions or extended repayment/grace periods, or even restructuring the loan terms. The goal is to work together and turn the sub-performing loan into a viable performing loan for both the borrower and lender through these methods.
A non-performing loan requires the lender to understand the borrower’s financial situation and create a repayment strategy. The plan can encompass a new payment schedule, adjusting loan terms, or settling the loan for a lower amount.
American Equity Funding uses the following strategies for a non-performing loan.
- Does the payer want to keep the property? Depending on the answer, we form an individualized strategy.
- YES: Can a payment be made for the current month; if yes, is a payment possible for the next six months; if yes, and the payer follows through, American Equity Funding will likely modify the loan to current, add back the delinquency or in some cases, waive the delinquent amount depending on the amount of equity.
- NO: If the payer does not want the property or cannot make a payment, an option is given to list and sell the property providing there is enough equity to pay off our loan with money left over for the payer.
If that is not possible, we ask for a deed in lieu of foreclosure. This strategy enables the payer to avoid a record of foreclosure while also allowing American Equity Funding to get the property in our name without the usual required time or costs.
Our priority is always to allow the buyer to keep the property if they desire and have the means to do so. However, if all the above options are refused, we have no choice but to foreclose.
In conclusion, performing, sub-performing, and non-performing loans are crucial terms to understand in lending and risk management. Each of these loan types has different risk levels and service strategies. Understanding these distinctions will be a benefit in making informed financial decisions.
American Equity Funding is a buyer of owner-financed mortgage notes and purchases as well as performing, sub-performing, and non-performing mortgage notes.
For further clarification or questions, please call Ryan or Steve at 1-800-874-2389.