Borrower wants to pay significant portion of down

[James Palassis]

I am the lender on a 3 year loan with a balloon at the end, we are 14 months into it. My borrower came to me today to see if I would accept a $50,000 principal only payment, representing about 50% of the total loan amount. I am good with the paydown, but normally I would keep the payment amount the same and just adjust how much is going to principal and interest each month. My issue is, he wants the payment to be reduced roughly 50% to reflect the lower principal amount. 

I have worked with this borrower many times, never been a day late on payments. But I want to make sure I'm protected. Is the move here to get a new promissory note through a real estate attorney? Could I draft my own note and have each party notarize the new terms of the loan?

Any help or suggestions are greatly appreciated!

[Jeff S.]

“Could I draft my own note and have each party notarize the new terms of the loan?”

I hope you didn’t draft your loan documents in the first place, @James Palassis. Notes are only signed. Recorded documents, such as the associated mortgage/deed of trust get notarized.

In this case, you would use a lending attorney to draw up a loan modification agreement. This would explain the existing terms, verify current amounts owed, correct any lingering errors, etc.,  and define the new loan terms. The loan modification would be signed by you and your borrower and filed away with the original note.

Loan mods that affect the mortgage/deed of trust or your title insurance, among many other reasons, should be recorded. Examples might be a change to the maturity date or additional funds loaned. Title and any subordinate lenders should also be notified. In this case, a separate Memorandum of Modification (or whatever it’s called in your state), which broadly tells the world that the loan has been modified but with no specific details, would be notarized and recorded.

Your lending attorney could tell you whether anything should be recorded and how to deal with any existing subordinate lenders. Since it’s always better to be safe than sorry, we always record.