Loan modifications, forbearance agreements, and repayment plans are different ways that borrowers can avoid foreclosure. Read on to learn the difference between these options and how they can help you if you are having trouble making your mortgage payments.
A loan modification is a permanent restructuring of the mortgage where one or more of the terms of a borrower's loan are changed to provide a more affordable payment. With a loan modification, the lender may agree to do one of more of the following to reduce your monthly payment:
- reduce the interest rate
- convert from a variable interest rate to a fixed interest rate, or
- extend of the length of the term of the loan.
Generally, to be eligible for a loan modification, you must:
- show that you cannot make your current mortgage payment due to a financial hardship
- complete a trial period to demonstrate you can afford the new monthly amount, and
- provide all required documentation to the lender for evaluation.
Required documentation will likely include:
- a financial statement
- proof of income
- most recent tax returns
- bank statements, and
- a hardship letter.
There are many different loan modification programs available, including proprietary (in-house) loan modifications, as well as the Home Affordable Modification Program (HAMP), which is part of the federal government’s Making Home Affordable initiative. HAMP assists borrowers by modifying their first lien mortgages so that the monthly payments are lower and more affordable. To learn more about HAMP, see The Home Affordable Modification Program (HAMP). (To find out about other government programs for struggling homeowners, see our Government Foreclosure Prevention Programs topic area.)
If you are currently unable to afford your mortgage payment, and won’t be able to in the near future, a loan modification may be the ideal option to help you avoid foreclosure.
While a loan modification agreement is a permanent solution to unaffordable monthly payments, a forbearance agreement provides short-term relief for borrowers. With a forbearance agreement, the lender agrees to reduce or suspend mortgage payments for a certain period of time and not to initiate a foreclosure during the forbearance period. In exchange, the borrower must resume the full payment at the end of the forbearance period, plus pay an additional amount to get current on the missed payments, including principal, interest, taxes, and insurance. (The specific terms of a forbearance agreement will vary from lender to lender.)
If a temporary hardship causes you to fall behind in your mortgage payments, a forbearance agreement may allow you to avoid foreclosure until your situation gets better. In some cases, the lender may be able to extend the forbearance period if your hardship is not resolved by the end of the forbearance period to accommodate your situation.
In forbearance agreement, unlike a repayment plan, the lender agrees in advance for you to miss or reduce your payments for a set period of time.
If you’ve missed some of your mortgage payments due to a temporary hardship, a repayment plan may provide a way to catch up once your finances are back in order. A repayment plan is an agreement to spread the past due amount over a specific period of time.
Here’s how a repayment plan works:
- The lender spreads your overdue amount over a certain number of months.
- During the repayment period, a portion of the overdue amount is added to each of your regular mortgage payments.
- At the end of the repayment period, you will be current on your mortgage payments and resume paying your normal monthly payment amount.
This option lets you pay off the delinquency over a period of time. The length of a repayment plan will vary depending on the amount past due and on how much you can afford to pay each month, among other things. A three- to six-month repayment period is typical.
To get information about these and other options to avoid foreclosure, see our Alternatives to Foreclosure area.