What's the Difference Between a Forbearance Agreement, Repayment Plan, and Loan Modification?

Forbearance agreements, repayment plans, and loan modifications are different ways that borrowers can avoid foreclosure.

By , Attorney

Forbearance agreements, repayment plans, and loan modifications are mortgage workout options that borrowers can use to avoid foreclosure.

  • In a forbearance agreement, the loan owner ("lender") agrees to reduce or suspend your payments for a set amount of time.
  • With a repayment plan, the lender temporarily increases your monthly payment by adding part of the overdue amount to your current payments so that you can get caught up on the loan.
  • In a modification, the lender typically lowers your monthly payment and brings the loan up to date by adding any past-due amounts to the balance of your debt.

How Forbearance Agreements Work

A forbearance agreement provides short-term relief for borrowers. With a forbearance, the lender agrees to reduce or suspend mortgage payments for a while. During the forbearance period, the servicer (on behalf of the lender) won't initiate a foreclosure. In exchange, the borrower has to resume making payments at the end of the forbearance period, and typically get current on the missed payments, including principal, interest, taxes, and insurance. You can usually:

  • pay the amount in a lump sum
  • add an extra amount to your regular payments each month until the entire skipped amount is repaid, or
  • complete a loan modification (see below) in which the lender adds the unpaid amounts to the balance of the loan. (If you need a lower monthly payment at the end of the forbearance period, a modification might accomplish this goal, too.)

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 if your hardship isn't resolved by the end of the forbearance period to accommodate your situation.

In a forbearance agreement, unlike a repayment plan, the lender usually agrees in advance for you to miss or reduce your payments.

Repayment Plans: Getting Caught Up on Past-Due Amounts

If you've missed some of your mortgage payments due to a temporary hardship, a repayment plan might provide a way to catch up once your finances are back in order. A repayment plan is an agreement to repay the delinquent amounts over 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'll be current on your mortgage payments and resume paying your normal monthly payment amount.

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.

A Modification Permanently Changes the Loan Terms

A loan modification is a permanent restructuring of the loan where one or more of the terms are changed to provide a (hopefully) more affordable payment. If you're currently unable to afford your mortgage payment due to a change in circumstances, but you could make a modified payment going forward, this option might help you avoid a foreclosure.

How the Lender Adjusts Your Payment

With a modification, the lender might agree to do one or more of the following to lower your monthly payment:

  • reduce the interest rate
  • convert a variable interest rate to a fixed interest rate
  • extend the term of the loan, or
  • forbear some of the principal balance. ("Forbearing" the principal means setting aside a portion of the total debt before calculating your monthly payment. The borrower typically has to pay the set-aside portion in a balloon payment when refinancing or selling the home, or when the loan matures.)

How to Qualify for a Modification

Generally, to get a loan modification, you must:

  • provide all required documentation, including a financial statement, proof of income, your most recent tax returns, bank statements, and a hardship statement, to the servicer for evaluation
  • show that you can't make your current mortgage payment due to a financial hardship, and
  • complete a trial period to demonstrate you can afford the new monthly amount.

You'll also have to meet all lender guidelines, which can be extensive and complicated.

Different Kinds of Modifications

Many different loan modification programs exist, including proprietary (in-house) loan modifications, as well as Fannie Mae and Freddie Mac Flex Modifications. Other special modification programs are also available for certain kinds of loans, like FHA-insured loans.

Getting Help

If you want to learn more about alternatives to foreclosure, consider talking to a foreclosure attorney or a HUD-approved housing counselor.

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