Intro to Mortgages

Forbearance or Loan Modification?

Jet Direct Mortgage

“Forbearance” is becoming quite a common term these days as the Coronavirus pandemic continues. And with so many folks still unemployed, it’s quite possible that a large number of them will have difficulty making mortgage payments. As the word becomes more popular, it’s increasingly important for those who could benefit from forbearance be aware of what the term actually means. In short, forbearance means temporarily suspending monthly mortgage payments until the end of the forbearance period. This is something that must be agreed upon by the borrower and the lender. A borrower cannot simply stop making monthly payments without notifying the lender, as this would likely result in defaulting and potential foreclosure. The forbearance process varies by state and lender. Lenders will do everything they can to avoid foreclosure. It’s costly and they wind up owning property they have no real interest in owning. Although forbearance should only be considered when all other possibilities have been exhausted, lenders are typically more than happy to work with you in order to avoid foreclosure. It’s important to remember the suspended payments will be due at the end of the forbearance period. Forbearance is not the same as forgiveness. Loan modifications are often the initial option when a borrower expresses difficulty in making mortgage payments. This will need to be discussed with your lender. The terms of a loan agreement cannot be altered without a legal modification or refinance. Refinancing might not work as interest rates are not always low enough. But loan modifications are a little different. Lender’s will try to work with the borrower by changing the terms of the loan in a way that will benefit both the borrower and the lender. Examples include:

  • Reducing the principal balance of the loan
  • Temporarily lowering the interest rate
  • Extending the duration of the loan resulting in lower monthly payments but acquires more interest
  • Switching from the uncertainty of an adjustable rate mortgage to the stability of a fixed rate mortgage

In order to acquire a loan modification, the homeowner will have to complete and application and provide certain documentation. The lender needs to be certain that the borrower will be able to make payments for the newly modified loan. Some lenders even allow borrowers a trail period to try out a modified loan to make sure the payments will be made. For example, the borrower might be expected to make payments for three months and if those payments are met on time, then the loan will go into a permanent modification. Although forbearance may be the optimal option for some, it’s not the best decision for everyone. Sources: