How do you know if the borrower can actually pay?

Determining if a borrower can pay involves a mix of "forensic" research (before you own the loan) and direct negotiation (after you own the loan).

You are essentially "re-underwriting" the borrower to see if their financial situation has recovered from the event that caused the default.

Here is how you determine if a borrower has the ability to pay.

1️⃣ The "Silent" Indicators (Before You Contact Them)

You can learn a massive amount about a borrower’s finances without ever speaking to them by looking at their payment behavior on other debts.

✳️ The Senior Lien Status (For 2nd Liens): This is the strongest indicator. If you are buying a second mortgage and the credit report shows the borrower is paying their First Mortgage (Senior Lien) on time, they have the ability to pay for housing.

Why it matters: If they are paying the first, they have income. If they are paying the first but not the second, it is often a prioritization issue, not a lack of funds.

✳️ Property Taxes (For 1st Liens): If you are buying a first lien, check the county tax records. If the taxes are current, the borrower has the funds and the intent to protect the asset.

✳️ Lifestyle & "Other" Trade Lines: Look closely at the credit report for "lifestyle" debts. The "Land Rover" Indicator: One source notes finding a borrower who wasn't paying their mortgage but had a current loan on a Land Rover and an American Express card. If they are paying credit cards and car notes, they have cash flow; they are just choosing not to pay the mortgage.

✳️ Debt Paydown: If you see they are paying more than the minimum on credit cards, they have disposable income.

✳️ Bankruptcy Schedules: If the borrower has filed for bankruptcy, pull the Voluntary Petition and Schedules from PACER. This documents their assets, income, and expenses down to the penny. It is the most accurate financial picture you will ever get because lying on these forms is perjury.

2️⃣ The Direct Approach (Once You Own the Loan)

Once you make contact, you shift from guessing to verifying.

✳️ The "Big Three" Questions: Start every conversation with: "What happened? Where are you now? And what do you want to do?".

What happened: Was it a temporary job loss or a divorce?

Where are you now: Have they recovered? Are they back to work?.

What do you want to do: Do they want to stay in property? Do they want to leave?

✳️ Request Financials (The "Hardship Package"): If a borrower claims they cannot afford your proposed payment, ask them to prove it. Request: Two to three months of bank statements. Two to three years of tax returns. Current pay stubs. A hardship letter explaining their situation.

✳️ Strategy: Often, borrowers will magically "find" the money to pay your requested amount because they do not want to go through the hassle of digging up all these documents for you.

✳️ The Down Payment Test: Talk is cheap. If a borrower says they can pay, ask for a down payment to start a modification plan. A down payment (skin in the game) is the best proof that they have access to capital and are committed to the resolution.

3️⃣ Alternative Wealth Indicators

Sometimes the borrower looks broke on paper but has assets elsewhere.

✳️ Other Real Estate: Use a tool like DataTree to search the borrower’s name. You may find they own rental properties or other assets free and clear in the same county. This indicates deep pockets and leverage for you.

✳️ Pride of Ownership: Look at Google Street View or photos from a drive-by. Is the lawn manicured? Is there a flag flying out front? Are there nice cars in the driveway? These visual cues distinguish a borrower who has given up from one who is invested in the home.

Summary Checklist