Larry Lapidus

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Forbearance vs. Loan Modification

Okay, the term “forbearance” has entered into our everyday real estate lingo. As unemployment numbers rise and unemployment claims are filed, it’s very possible a homeowner will have difficulty paying the mortgage. For most, unemployment compensation is not enough to sustain someone for very long. It’s not supposed to. It’s there to help offset a financial loss up until the point where the homeowner goes back to work.

Forbearance simply means holding off the monthly mortgage payments for a time. A forbearance is something you and your lender would agree to. Just stopping payments without the lender understanding what’s going on would most likely trigger the foreclosure process. Different states may have different rules lenders must follow when foreclosing but most will allow for two payments in a row to be skipped but once the second payment goes missing the lender may issue a Notice of Default, explaining what may happen if the missed payments aren’t made. 

Lenders are loathe to foreclose. It’s expensive for them and they’ll end up holding real estate they never intended to own. Foreclosing on a home and selling it at an auction can be not only lengthy but costly. They would much rather work something out and a forbearance is one way to accomplish that. At the end of the agreed upon term of the forbearance it’s time to pay the piper. Those missed mortgage payments don’t go away, they have to be paid. And that can mean a large balloon payment looming in the near future.

Instead, a loan modification might be an easier choice. Of course, any such decisions should be made with the assistance and advice of a professional. With a loan modification, the note is legally modified, or changed. The terms of a note can’t be altered without a modification or a refinance. But with a refinance, often the new interest rate can’t be lowered enough in order to qualify. With a loan modification, it’s different.

The lender will counsel with the homeowner in an attempt to change the note into something more affordable and there are a few options.

• A principal reduction which literally lowers the outstanding mortgage balance providing lower monthly payments. This is the least likely the lender will agree to.
• Getting a lower rate is also a possibility. That seems obvious but in many instances it’s not a “forever” thing but just for a short term.
• Lenders might also agree to extend the term of the mortgage which will also lower the monthly payment. This also means more interest will be paid over the life of the loan.
• A modification can mean switching from an adjustable rate mortgage to the stability of a fixed rate loan.

A loan modification means the homeowner must complete an application to modify and provide certain financial information. The biggest consideration is making sure the homeowner can afford the newly modified loan. This means verification of income. If the modified loan comes up with say $1,500 per month mortgage payment as a qualifying figure, there will need to be somewhere around $4,500 per month in gross income. 

Other modification plans will be in the form of a “trial modification” which means making sure the homeowner makes the new monthly payments for a specific period, say three months. If those payments are made on time, the existing note will be modified to a program the homeowners can afford.

If you have the choice, a modification might be the better option. But again, in such a situation, professional counsel should be on your plate.

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