Many consumers who are struggling to pay their mortgage do not know the difference between a loan modification and a mortgage loan forbearance. Following are a few of the most important points you should know about both mortgage loan modification and forbearance.
What is Loan Modification?
A loan modification is a negotiated remedy between a homeowner and the lender which enables the homeowner to remain in his or her home while eliminating the lender’s need to foreclose due to the homeowner’s default on the mortgage loan. A loan modification is ideal for a homeowner whose payments have become unaffordable as a result of interest rate resets, a loss in income, or an increase in expenses. However, a loan modification will not be approved if a homeowner cannot demonstrate an ability to make the modified mortgage payment.
The key feature of a loan modification which distinguishes it from mortgage loan forbearance is that one or more loan terms are changed in order to make the loan more affordable for the homeowner. A loan modification may involve:
- Reducing the interest rate
- Changing an adjustable interest rate to a fixed interest rate
- Extending the term of the loan
- Eliminating a pre-payment penalty
- Eliminating a balloon payment, or
- Reducing the principal balance to the present value of the property.
What is Mortgage Loan Forbearance?
Mortgage loan forbearance is also a negotiated remedy. It is ideal for a homeowner who is experiencing a temporary or short-term financial hardship. Mortgage loan forbearance allows a homeowner who has fallen behind on his or her payments to bring them current over a short period of time, usually six months to a year. In most instances, the homeowner will be required to pay the delinquency in equal installments over the term of the forbearance agreement. These payments are in addition to the regular monthly mortgage payments. Additionally, the homeowner may be required to pay about 25% to 30% of the delinquency upfront.
A forbearance agreement may also involve a temporary suspension or reduction of mortgage payments. If the lender agrees to temporarily reduce or suspend the mortgage payments, any principal or interest which is unpaid during the forbearance period will be added to the principal balance of the loan and may be due in a balloon payment when the loan matures.
Getting Legal Help
Before entering into a loan modification agreement or a loan forbearance agreement, you should carefully read and understand all of the terms in the agreement. You may want to seek the advice of an experienced real estate attorney or, if you can't afford an attorney, get free advice from a HUD-approved housing counselor. To find a HUD-approved housing counselor, visit www.hud.gov and click "Talk to a Housing Counselor." For tips on hiring an attorney, see our article "Hiring a Lawyer to Fight Your Foreclosure."