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're 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 loan owner ("lender") might agree to do one of more of the following to reduce your monthly payment:
Generally, to be eligible for a loan modification, you must:
Required documentation will likely include:
Many different loan modification programs are available, including proprietary (in-house) loan modifications, as well as the Fannie Mae and Freddie Mac Flex Modification program.
If you're currently unable to afford your mortgage payment, and won’t be able to in the near future, a loan modification might be the ideal option to help you avoid foreclosure. (Read about how to get a loan modification. Also, be sure to learn the do's and don'ts when trying to get a modification.)
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 might allow you to avoid foreclosure until your situation gets better. In some cases, the lender might 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:
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.
If you want to learn more about alternatives to foreclosure, consider talking to a foreclosure attorney or a HUD-approved housing counselor. (Learn about the benefits of using a HUD-approved housing counselor.)