DEFINITION of 'Distressed Borrower'

A borrower who is unable to fully repay his or her debt due to financial difficulties - difficulties either created by personal circumstance or the terms of the loan which he or she did not fully understand or was not able to meet when originally agreeing to the loan. The term "distressed borrower" is most commonly used to refer to homeowners at risk of foreclosure.

BREAKING DOWN 'Distressed Borrower'

Lenders have several options when working with a distressed borrower. The most common alternatives for distressed homeowners are:

- Forbearance: allowing the borrower to reduce or suspend their payments for a specified period of time and then agreeing to another option to "get current" on their current repayment amount.

- Reinstatement: allowing the borrower to pay the delinquent amount in one lump sum payment to get current on the balance amount.

- Loan modification: permanently restructuring the terms of the loan to either lower the total repayent amount required by the borrower or extend the length of time given to repay the full loan amount.

- Short sale: selling the home for less than the unpaid balance (UPB) on the loan and the lender forgives the remaining amount.

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