Loan Modification vs. Forbearance Plan

People who are having trouble with paying their mortgages may have either loan modifications or loan forbearances available to them. There are some important differences between the two that consumers should understand before applying for either one.

Understanding Loan Modifications

In a loan modification, the homeowner and the borrower negotiate a solution that allows the homeowner to stay in the home while also allowing the lender to avoid foreclosing on it. Loan modifications are good for homeowners whose payments are no longer affordable because of income losses, increases in expenses or interest rates that have reset. In order to be approved, a homeowner must be able to show that he or she will be able to make the modified payment.

Loan modifications are distinguished from mortgage forbearances because one or more of the terms of the loan are changed in order to make the payments more affordable. Loan modifications may include any of the following:

Understanding Mortgage Loan Forbearances

Like loan modifications, loan forbearances are negotiated between borrowers and servicers or lenders. They are good for homeowners who are experiencing temporary setbacks. Loan forbearances let homeowners who have fallen behind on their payments to bring them current over a short period normally lasting from 6 months to 1 year. In most cases, the delinquency will be divided between the months of the forbearance period and added to the regular payments. The lender agrees not to foreclose during the forbearance period. It may require the homeowner to pay up to 30 percent of the owed delinquency up front.

Some forbearances involve suspensions or reductions of mortgage payments on a temporary basis. Any interest or principal that accrues during the forbearance is then added to the principal balance and may become due as a balloon payment upon the loan’s maturation.

Contact an Attorney

When a homeowner is trying to decide whether to try to get a loan modification or a loan forbearance, he or she should make certain to read and understand everything that is included in any proposed agreement before signing it. People may want to consult with an experienced lawyer for advice about their proposed loan modifications or loan forbearances. To schedule a free appointment contact us today.