A payer who has paid every month but cannot refinance the balloon leaves you choosing between extending the note, re-amortizing it, enforcing it or selling it. Make the choice before the due date if you can, because a note that is still current gives you and any buyer more to work with than one in default.
How a good payer ends up here
A balloon is one large payment that clears whatever is still owed on a set date. The monthly payments may be sized as if the loan ran for 30 years, for example, while the note makes the whole balance due after five. Both sides expected the payer to replace your note with a bank loan before then.
That expectation fails for ordinary reasons. The payer’s credit or income falls short of what a bank wants. Bank rates have risen above the rate on your note, so the new payment would be out of reach. The property does not appraise for enough, or it is a kind banks are slow to lend on, such as bare land, a mobile home or a mixed-use building. What you are left with is a borrower who has kept every promise except the last and largest one, which is a different problem from a borrower who has stopped paying.
Read the note, the record and the equity
Start with the note itself. Find the exact due date, any notice you are required to give, what it says about late charges or a higher interest rate after maturity, and whether it already contains an option to extend.
Then look at the payment record. Years of on-time payments followed by a failed loan application point to a lending problem. A year of late payments followed by the same failure points to the payer, and that changes which of the choices below is safe.
Last, estimate the equity, meaning what the property would sell for less everything owed against it, your note included. Plenty of equity lets you be patient, since the property covers you if things go wrong. Thin equity means time is working against you.
The choices side by side
| Choice | What you get | What it costs you |
|---|---|---|
| Extend the due date | Payments continue and the balloon moves out a few years | You wait longer for your money and stay the lender |
| Re-amortize | The balance is spread over a new schedule with no balloon | No lump sum at all, and a longer commitment |
| Enforce the note | The property, or a payoff forced by the process | Legal costs, time, and a property to deal with |
| Sell the note | Cash now and no further part in it | A discount, and the buyer decides what happens next |
Extending
You and the payer sign a written modification that moves the balloon to a later date. The payer needs your agreement, which makes this the moment to ask for something in return: a higher interest rate, a lump sum toward principal, a larger monthly payment or a fee. What a lender may charge can be limited by state lending rules, so have an attorney draft or review the document.
Where the original mortgage or deed of trust was recorded, ask the attorney or a title company whether the modification should be recorded as well. An extension agreed on a handshake leaves a note that is past due on paper, and that is a hard note to sell later.
Re-amortizing
To amortize a loan is to pay it down in level payments until nothing is owed. Re-amortizing swaps the balloon for a new schedule that does exactly that. It suits a payer who is unlikely ever to qualify at a bank and a holder who prefers income to a lump sum, and the note that results has no balloon in it for a future buyer to doubt.
Enforcing
Once the balloon date passes unpaid the note is in default, and the documents generally give you the right to foreclose, or to use the forfeiture process if you hold a land contract. This is the slow and costly route. The rules differ widely between states, and it can end with you owning a property you sold years ago. Speak to a local real estate attorney before you send any formal notice.
Selling
A sale can happen before the balloon date or after it, and the two are priced very differently. With a year or more still to run, yours is the earlier question of whether to sell before the balloon comes due.
How a buyer prices a balloon that may not be paid
A buyer pays for the cash they expect to receive, and on a balloon note a large share of that cash is the balloon. The buyer’s first question is therefore how likely it is to arrive on the date. One who learns the payer has already been turned down will assume it is not coming and will price the note as one they will have to extend themselves, which lowers the offer.
How far it falls depends on what else the buyer can see. A long clean payment record helps, because it suggests the payer will keep paying under an extension. So does equity, since the property covers the buyer if the payer fails. Lien position counts as well: that is your place in line to be paid if the property is sold, and a first lien is worth more than a second. Most of all it matters whether the note is still current. Sold before the balloon date it is a performing note. After a missed balloon it is a matured note in default, which fewer buyers will bid on.
One consequence follows from the way a balloon payment affects a note’s value. Extending first and selling second can bring a better price than selling a note that is weeks away from a balloon nobody expects to be paid. To test that on your own note, send us the note details with the balloon date and what you know of the refinance attempt, and ask for a price on the note as it stands and an indication of how a signed extension would change it.
Selling only part of it
In a partial purchase a buyer pays for a set number of payments and the note returns to you afterwards. A partial on a note with a balloon could mean selling a run of monthly payments and keeping the balloon, or the other way round. Whether a buyer will do either while the balloon is in doubt depends on the buyer and on your note, and an extension may have to come first.
When keeping the note is the right answer
With a clean payment record, real equity and no need for the lump sum this year, an extension on better terms keeps the full balance working for you and goes on earning interest, where a sale would give some of that balance away. Selling is the better choice when you need the cash, when you no longer want to be the lender, or when the payer’s record makes you doubt the next five years. Those are the same tests that apply in the other situations where a holder thinks of selling, with a due date added.
Before the due date arrives
Ask the payer which lenders they applied to and what each one said, and get it in writing if you can, because a buyer will ask you the same question, and so will an attorney drafting an extension. Then mark a day in your calendar, well ahead of the due date, for choosing between extending, re-amortizing, enforcing and selling. A choice made while the note is still current is yours to make, and one left until the balloon is missed is made with fewer buyers and a note in default.
Related questions
Does a missed balloon mean my note is worthless?
No. The lien on the property is still in place and the debt is still owed. The note becomes harder to sell and fewer buyers bid, but a note with a good payment record and real equity behind it still has value.
Can I charge the payer for extending the balloon date?
An extension is a new agreement, so you can ask for terms in return, such as a higher rate, a principal paydown or a fee. Lending rules vary by state and by the type of property and borrower, so have an attorney draft or review the modification.
Will a buyer extend the balloon for my payer after I sell?
That is the buyer's decision once they own the note, and you have no say in it after closing. A buyer has a reason to consider it, since a borrower who keeps paying under an extension costs less than a foreclosure, but nobody can promise it on the buyer's behalf.