What to Do When a Balloon Mortgage Payment is Due – Real Deal #158

Owner financed notes often include a balloon payment requiring the buyer to refinance in order to payoff the remaining amount due the seller.

But what options are there for notes when a balloon is due but the buyer can’t refinance? Should the seller consider extending?

Here’s a look at a common dilemma facing sellers and note brokers. (Note: The specific details were modified for privacy protection.)

Dear Note Investor,

I was approached with a balloon payment mortgage note now due after 5 years of payments… but buyer/payer cannot come up with new financing due to market conditions for financing.

Should the note holder…

1.   Create addendum to existing note and extend payments until financing can be arranged? Or…

2.  Create addendum/rewrite to existing note for terms, interest and payments to eliminate balloon? Therefore, having a marketable note.

Here’s the existing info:

  • Selling Price:  $300,000
  • Down Payment:  $84,000
  • First Lien:  $216,000
  • Date of Note:  6/1/2005
  • Terms:  360 /60 (payments based on 30 year amortization with balloon due in 5 years)
  • Payment:  $1,192.76
  • Balloon Amount:  $199,042 +/-
  • Interest Rate:  5.25%
  • Pmts paid:  60
  • Pmts left:  Balloon Payment

Any advice… please?

And here’s our answer the the Balloon Payment dilemma:

Dear Note Broker,

Great to hear from you! You ask a very good question, especially in today’s economy.

You are correct. In order for this note to be purchased by an investor they would most likely need to look at a modification to extend the balloon.

There are two big unknowns on this deal that would play a major role on any note buyer’s offer:

1. the credit score of the property buyer; and

2. the current value of the property.

If the buyer can get refinancing, the seller would probably just want to extend for a couple of months.

If the buyer is unable to refinance, the seller may want to consider a modification and longer extension rather than starting foreclosure for nonpayment of the balloon mortgage.

One solution is for the seller to modify the note with monthly payments based on a 25 or 30-year amortization and keep, but extend, the balloon payment to 7-10 years from the date of modification.

They could agree to let the note fully amortize and eliminate the balloon altogether. However, this could limit the seller’s options in the long run.

By extending the balloon, the seller is not obligated to keep receiving payments for another 25-30 years. The extension provides the buyer both time and motivation to get their financial affairs in order to qualify for refinancing.

A balloon payment can also improve pricing from note investors based on the time value of money. (For more information please read: Owner Financing – Why Balloon Payments Are Good For Mortgage Notes.)

It would be to the seller’s benefit to get that interest rate increased in exchange for extending out the balloon. They should be sure any modification is prepared and recorded by a title company or attorney to be certain it follows the laws of their state and protects their first position lien holder’s interest.

I have to give the disclaimer that I can’t give financial or legal advice as that is not my licensed profession. My comments are based on what makes the note more valuable to somebody that would be purchasing the note. For specific pricing mortgage buyers will want to review the documentation along with the current property value, payment history, and credit history.

All the best,

Tracy Z. Rewey of NoteInvestor.com

About Tracy Z

Tracy combines her knowledge of cash flow notes with the power of marketing online to help grow your business! She can be reached at Tracy@NoteInvestor.com 1-888-999-7905 or at Exposure One Marketing.


  1. DeeAnn P. says

    Hi. We sold a rent house in Texas in August of 2015. Although we didn’t plan to finance the loan, the buyer asked us to finance for 3 years because they had some credit issues to correct and could get a better interest rate within that time with a VA loan and they agreed to put down an 18% down payment. The buyer emailed me a few days ago and asked if we could extend the payoff of the balloon for another year. We really prefer not to because they have been late even beyond the grace period with some payments, but they have brought their account up to current recently. (They do still pay on the last day or so of their grace period.) We would like to help them out but don’t want to risk losing our money since we don’t know much about the whole lending process and the legalities of changing the terms. We fear that if we don’t follow the note and DT to the T, the buyers will be able to use some loophole to avoid paying us back. Although the equity in the house is very good and it wouldn’t hurt us financially if the house was returned to us, we don’t want to have to foreclose on a family. But … we want to make sure that we aren’t going to risk our money either. How safe and how expensive is it to extend a balloon note payoff date? If the buyer (Note Maker) pays the costs of extending this balloon note (fees to consult an attorney and any attorney fees if we agree to extend), will that cause any risk to us as the Note Payee? Will the original Note, DT, and Title policy still provide the same protections for our interest in the loan?

  2. I am a Real Estate Investor with numerous CFD(Contract For Deed) notes that are typically amortized for 30 years with a 5 year call/balloon. What are MY options when the buyers/borrowers cannot pay me off and basically the note/contact expires. Note: After five(5) years….many/if not all the homes….have escalated way over the original note/sales price……I typically do not want the homes back….but I do not want to leave 40k+ on the table either…..what are your suggestions. Tx!

    Sales Price: $229,000
    Down Payment: $16,000
    Note Amount: $213,000
    Payment: $1670.00/month
    Current Payoff: $200,800+/-
    Current Market Value: $270,000

  3. Hello Tracey,
    I have a owner finance mortgage with a balloon due soon. I’m not behind in my mortgage, nor have I been in the last 5 years, I was behind with the taxes but got those paid. I’ve tried to get financing, but my score is too low. My credit score issues are from late payments from the past. I don’t have any new credit. I was told that the Owners should’ve been reporting my monthly payments to the credit bureau? Thank you in advance

    • Hello Jai,
      Congrats on keeping current on your note! I suggest talking with the owner and seeing if the two of you can come to a mutually beneficial agreement for either extending the balloon or creating an amortization schedule that allows for the note to pay in full without a balloon. If you decide to modify the terms be sure to consult with an attorney or title company for the property documentation.

      One option for getting the current payments to be report to a credit bureau is having the note serviced through a third party servicing company that has the ability to report to the credit reporting agencies. Unfortunately those agencies don’t make it easy for an individual seller to report on an owner financed mortgage. They have all sorts of data feeds and verification processes that are more suited to a servicing entity to meet all the compliance requirements.

  4. I have a 3 year land contract with a maturity date by April 31 2017 must pay balance in full. What happened s if I can’t get a loan for the remainder of the balance? It’s non recorded and I am in Wisconsin… Thank you in advance…

  5. My balloon expired Nov of 2016 and ive been working since Aug of 16 to refinance. HSBC is the current lender and will not extend or modify the loan. I am in the final approval status from a new lender with conditions. The condition in question is to be current, however HSBC will not accept a payment to satisfy the condition. This mess has consumed my life and i feel like ive paid 15 years at a high interest for nothing….running out of options and time, any suggestions would be greatly appreciated.

  6. We had a 1 year intrest only mortgage note with a private lender. The maturity date was April of 2010. We have been making the same payment every mon the for the past 6 1/2 years with put a renewal note or a demand of the ballon payment. Have we been paying towards the principal all this time since there is not a new mortgage note and the lender has never filed a deed of trust?

    • Hello Dannette, Generally an interest only payment only covers the interest due so the unpaid principal balance does not change. The amount owed at the beginning of the note is the same as that owed at the end when it balloons. If an amount above the interest only monthly payment is paid then that goes to principal. That extra amount would lower the principal balance and impact future interest/principal applications.

      For example a $100,000 note at 10% with interest only payments and a balloon in 5 years would have a monthly payment of 833.33 ($100,000 x .10 / 12). At the end of 5 years the $100,000 would still be owed UNLESS more than $833.33 per month was paid. If the balloon was never paid and the $833.33 per month continued (without any extra) then in theory the note would never pay off and the balance would remain the 100,000. This is all based on the terms of the individual note so terms can differ.

      There are potential issues for both sides if a note has gone past its balloon/maturity date. You can consult with an attorney to see how this might impact your situation. You can also contact the holder of the note and look into renegotiating the terms of repayment so it starts to amortize.

  7. My mortgage was sold to Ocwen and I’ve been trying to do a modification twice since my husband was laid off a year which brought us 3 months behind. Our first trial payment was great until the paper work came in and it had a balloon payment. I denied the modification due to the balloon payment n also applied for another modification n saying why I denied the first one cause it would hurt us in the long run with a balloon payment after 20 years.they sent me a letter saying my interest would drop for 5 years and now that I’m on my 3rd month to finalize the modification I receive another letter saying they offering it with a balloon payment again.. Should I keep fighting for a modification without a balloon payment since we’re still struggling or should I try n catch up what I owe behind. I wish they would just put my 3 moths behind of the loan since I can afford the normal payment as of right now but can’t afford normal payment n my back payments…

    • Hello Shanny, You are definitely on the right track by taking control of the situation and making efforts to make payment arrangements for the 3 months that are behind. Ideally the lender would add the payments to the end so it amortizes without a balloon. If they are unwilling to do that you still have options. When you are able you could pay a little extra each month to principal so there is not a balloon at the maturity date (just be sure there is no prepayment penalty). Over a 20 year period it could equal just a few dollars extra. You can run the necessary payment amount this takes on a free online amortization schedule. Be sure to double check the APR and disclosures to verify they aren’t charging unreasonable fees or increasing the rate on you. You can also contact an attorney for a free consultation to see if they have any suggestions for your particular situation. It is also good to check if there are any payment assistance programs like Home Affordable Refinance Program (HARP) or Hardest Hit Funds (HHF) for your area. Hope that helps!


    Invaluable comments – I Appreciate the points , Does someone know if my assistant might be able to locate a blank Freddie Mac 3291 example to edit ?

  9. Wanda Riddick says

    I received a balloon note maturity notice to pay off my loan in 100 days. The balance of this loan is $35,000, which I don’t have. I have had this loan since 1996 which ended up with HSBC. My monthly payment is $363 and is current. What are my options since I don’t have this lump sum to pay. Can it be refinanced? Extended? Let me hear from you! My income is social security and pension which totals about $2500/month

    • Hello Wanda, Our specialty is in the area of seller financed notes. We don’t originate new loans. I suggest talking to a lender or your note holder for possible options.

  10. When my balloon mortgage was becoming due, I applied to refinance with my mortgage company. I was declined because my bankrupcy was less than 2 years old. Then they suggested modification. I started that process. Was turned down for that because I’m now told (after over a month and a half) that they can’t do it because they can’t modify mature loans! How come they didn’t know this before taking me threw this? What do I do now to save my home?

  11. Ok Tracy Z here is my update, Mortgage processors said no to modification because we do not have a hardship, my relationship manager spoke to her manager and suggested calling around to banks and financing companies and getting quotes for how much they would finance based on home value, call her back with the highest amount and they would ask lender to accept as a settlement. Any advice? Thanks again.

    • It makes zero sense they won’t consider a modification to extend your term because you are current but that is sadly the SOP of many mortgage companies. At least they are exploring some possible solutions. It will be interesting to see what type of settlement they might offer based on the quotes from other lenders on the current home value. I strongly suggest talking to an experienced attorney and a tax/financial advisor before accepting any offers or signing documents. Things to consider and discuss would be whether you are 100% released from liability, how will it impact your credit, are there any tax consequences due to loan forgiveness, and/or other financial ramifications. It is a good time to bring in the experts that are familiar with your situation and long-term goals.

      • Tracy Murray says

        Hi Tracy, thought I would update again. We did find an investor wiling to refinance at the current value and it was promptly denied.$75,0000. No clear reason given only that servicer has to go by lenders guidelines. Was suggested by servicer that I do the deed in lieu, I was given the email and phone of lender and recording says it is servicer that makes all decisions. I did get an email response saying the same. After searching thru servicers web site I found guidelines for deed in lieu and it says the loan cannot have matured. I am being told by servicer to complete the paperwork of deed in lieu. I hate to say this (mostly because I am an optimist) but I feel like such a victim right now. I have saved all of my documents from start to finish on this and quite frankly am preparing for what looks like a foreclosure(there goes the credit score). Not the end of the world but having to start completely over seems daunting. Do you have any suggestions for where I can research circumstances like mine and how they worked out? Again I truly thank you for the time you’ve taken to give me some insight previously. Thanks Sincerely, Tracy

        • Hello Tracy, Perhaps the servicer will make an exception and still consider the deed in lieu? You might also contact an attorney to see what options are available to you in your state.

          • Final update. I really just wanted to say Thank you to Tracy Z it was very nice of you to explain some things during such a difficult time. We hired an attorney after being promised by our servicer we could do a deed in lieu and filling out paperwork over 7 different times each time being declined for different reasons. I am so glad we did. The attorney was kind of expensive @600 a month but well worth it in the end. I’d like to note here that the attorney worked with the lender in all of the legal parts and the servicer was absolutely ignorant of all going ons in the entire process. We sort of got a deed in lieu but it turned into a consent judgement . Basically it said we return the house and the lender would not sue us for any differences or cost in the sale of the house. The entire time this process took place and even after it had gone through the courts our servicer was calling and sending we can help you letters , Ironically the day our house sold (First day of foreclosure sale) the servicer sent us new paperwork to fill out to help save our loan. Your advise to deal with the Lender was the best advise. Unfortunately the lender would not speak to us at all , they did speak with our attorney and things worked out for the best. We are renting , love the look and size of our rental and will be waiting a while before if we ever buy again. Once bitten twice shy. Thanks Tracy Z and for anyone else going through this it may seem as though the lowest of blows to your pride and your family but have hope it gets better. If you look for good you see it.

          • Thanks for the update. I truly wish lenders would be more responsive to requests to find solutions. With private lenders you can usually find a reasonable ear but with the big institutional lenders you get lost in a sea of bureaucracy. I wish you and your family all the best on your path to new beginnings!

  12. I am in the same boat as Tracy M. My mortgage is a balloon that was due and I tried to do a refi before it matured but the appraisal came way. Now I am facing the fact that the balloon has matured and it feels like I am not able to do anything about it. I tried to work with the servicing company (Ocwen) and filled out paperwork for a modification/extension but was denied due to the fact that my assets show I can make monthly payments. I have no problem making monthly payments and would continue to do so if the balloon didn’t mature. Is there a way to communicate to them (Ocwen) that what I need is an extension on the balloon so I can make monthly payments while I take care of the problems that caused my house to be underwater? It seems that they (Ocwen) really doesn’t know the situation I am in and that I have to jump through so many hoops to correct this huge mistake I made 15 years ago. Please tell me that there is hope and a possible solution to this mess. Thanks. Mark P.

    • Mark, I haven’t heard back from OCWEN yet but hope to soon, I think the problem is that all the HARP guidelines require financial hardships, we do not have a loss of income at all we simply live in a home that lost value due to no fault of our own , Our financial hardship is simply put we don’t have the assets needed to pay the difference of our underwater loan. Good Luck I will post what my response is.

    • Theresa Keppard - Nelson says

      Mark I am on exactly the same situation with Ocwen. My loan will mature June 1. Can’t get refinancing. Ocwen won’ t do a modification because I am current and able to make payments. Please let me know if you find out info that helps. I am at my wits end.

  13. Thank you so much for your reply, I will start looking for the right person to talk to today. I have read over all of the HAMP information and because I am current and because I am not currently experiencing financial difficulties as in job loss I am not qualified. But I do have hope now. I appreciate you responding and sharing your knowledge with me. Have a wonderful day.
    I will keep you posted if you like. Tracy M

  14. Hi Tracy Z, I am currently in this exact position, I am upside down in my mortgage, I owe 92,000 and current sales in my area(if any) have houses at around 75, 80,000. I have a balloon loan that is about to mature, Current credit score is excellent and good , good. I would love to ask for an extension, I have spoken to many banks about refinancing but I would have to take out a home equity loan of at least $12,000 to even refinance , I am current on my loan, can I legally ask for an extension is it called something else? I have a loan servicing company that bought my loan named Ocwen are they who I would ask. When I asked if they could refinance they said no, They only service the loan, I believe Chase is the original owner. I would like to at least sound like I know what I am talking about. If you have any advise for me I would be so grateful. Thank you Tracy M

    • Hello Tracy (great name by the way)! Start with the servicing company but it is likely they will refer you to the owner/holder of the note. The servicing company (Ocwen) should have contact information for the owner. You are looking for a way to extend the balloon through a modification. This would allow you to keep making your monthly payment until the note/loan pays off naturally through amortization (assuming your payment amortizes the note). Provided the lien position is maintained, this can be a good option for both sides – especially when more is owed on a property than it is currently worth (also known as an “underwater” mortgage).

      A smart note holder will realize it is better to receive the monthly payments rather than spend the time and expense of foreclosing. It is possible they have other programs too such as Home Affordable Modification Program (HAMP) depending on the situation. You can find more information on HAMP here: https://www.hmpadmin.com/portal/index.jsp You may need to be very persistent if the note is held by a large company. It can be hard to find the right person in the sea of bureaucracy. On seller held notes or private investor notes they will usually see the benefits right away.

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