Bankruptcy

Forbearance Agreements, Repayment Plans, and Loan Modifications: Helping You Avoid Foreclosure

By Amy Loftsgordon, Attorney
Learn how a forbearance agreement, repayment plan, or loan modification could help you avoid a foreclosure.

If you can’t continue making your mortgage payments because they’re too high or you’re having trouble getting caught up on past-due payments, you might be able to avoid a foreclosure with a:

  • forbearance agreement, negotiated before you fall behind
  • repayment plan, negotiated after you’ve fallen behind, or
  • loan modification, negotiated either before you fall behind (if you’re likely to have trouble making upcoming payments) or after you’re already behind in payments.

In a forbearance agreement, the lender agrees to lower or eliminate your mortgage payments for a short period of time. In a repayment plan, on the other hand, the lender temporarily increases your monthly payment by adding some of the overdue sums—but will offer you a way to catch up on overdue amounts. With a loan modification, you usually get the best of both worlds: the lender lowers your monthly payment and brings the loan current by adding any past-due amounts to the balance of your loan.

Forbearance Agreements Temporarily Lower or Suspend Mortgage Payments

If you haven’t yet fallen behind in your monthly payments—but think you soon will—a forbearance agreement might help you avoid a foreclosure until your situation gets better. In a forbearance agreement, the lender gives you advance permission to make reduced mortgage payments—or no payments at all—for a while.

You might qualify for a forbearance agreement if you’re currently having trouble making the payments, but you can convince that bank that you will be able to afford them in the near future. For example, if you break your leg and can’t work for a few months, the lender might let you stop making payments until you go back to work. Forbearance agreements typically last three to six months, though a longer period might be possible, depending on the lender’s guidelines and your situation.

At the end of the forbearance period, you start making your regular payments again. In addition, you have to bring the loan current by paying the skipped amounts. Lenders usually offer few ways for you to repay the amounts that you didn’t pay during the forbearance period. For example, you can usually:

  • pay the full 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.

Get Caught Up With a Repayment Plan

If you’re already behind in mortgage payments because of a temporary financial hardship, but are now back on your feet, you might be able to get caught up through a repayment plan. For example, you probably qualify for a repayment plan if you fell behind in your mortgage payments because you lost your job, but now you’re re-employed.

In a repayment plan, you pay a portion of the overdue amount along with your regular mortgage payment over a period of time. For example, if you are three months behind on your monthly payments of $1,500 a month (a total of $4,500 behind), the lender might allow you to pay $750 extra each month over the next six months to get current on the loan. This means you’ll pay $2,250 a month for six months. At the end of the repayment period, you resume making your regular monthly payments of $1,500 a month.

Lenders usually give borrowers repayment plans that last three, six, or nine months. The lender probably won’t offer you a longer repayment plan because borrowers tend to have trouble making bigger than usual payments for an extended period of time.

Reduce Your Payment and Get Caught Up With a Loan Modification

With a loan modification, the lender agrees to change your loan terms, which in turn lowers your monthly payment to a more affordable amount. In order to reduce the payment, the lender typically agrees to lower the interest rate and extend the term of the loan. The lender also normally adds any past-due amounts to the unpaid principal balance as part of the modification.

To qualify for a loan modification, you’ll usually have to show the bank that you cannot make your current mortgage payment due to a financial hardship, but you can afford to make a lower monthly amount from now on. For example, if you now make less money because your employer cut your hours, you are probably a good candidate for a loan modification. As part of the modification process, you’ll have to complete a “trial period” to prove you can afford the new, lower monthly amount. Usually the trial period lasts for three months. If you make all three payments during the trial period, the lender will permanently modify the loan.

Most loan modifications used to happen under the federal government’s Home Affordable Modification Program called HAMP, but that program is no longer available. Now, almost all lenders offer in-house (proprietary) modifications to borrowers who are having trouble keeping up with mortgage payments and who qualify for help. Also, Fannie Mae and Freddie Mac (the government-supported enterprises that own or guarantee many mortgages) offer the Flex Modification program, which can lower an eligible borrower’s mortgage payment by 20%. To qualify for a Flex Modification, Fannie Mae or Freddie Mac must own or guarantee your loan and you must meet other eligibility criteria. Lenders often sell home loans to Fannie Mae or Freddie Mac on the secondary mortgage market. (When a borrower takes out a home loan, the originating lender underwrites, funds, and services the loan in the beginning. To get money to make more loans, most lenders eventually sell the loans they originate to other banks or investors, such as Fannie Mae and Freddie Mac, on the secondary mortgage market.) If the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) guarantees your loan, you might qualify for a modification under their programs for borrowers with those types of mortgages.

Getting Help

To learn if you qualify for a forbearance agreement, repayment plan, or loan modification, call your lender or mortgage servicer (that’s the company to whom you make your payments). If you need more information about different ways to avoid foreclosure, consider contacting an attorney or a HUD-approved housing counselor.

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