Forbearance Versus Loan Modification: Don’t Lose Your Home on a Technicality

With 15 million Americans having lost their jobs since the onset of the coronavirus pandemic, we’re seeing unemployment numbers pushed to their highest levels since the great depression. We are carefully following what options are out there for homeowners who are unable to make their mortgage payments. We want to be sure that if you find yourself struggling to make your mortgage payment, you take the time to really understand what is being offered to you. We would be heartbroken if you lost your property due to fine print and technicalities that weren’t clear to you when making your mortgage “stop-gap” decisions.

First, we have to say that we are not financial lawyers or advisors, so please call an expert in this field before you commit to anything in writing. Having said that, Kari worked the last recession and learned a thing or two that might be of help, and Erika is a lawyer who specializes in contracts (While Erika is not authorized to provide legal advice while serving in her capacity as real estate agent, we can provide you with recommendations for lawyers who can help you!)

How Forbearance Works

There is a big difference between forbearance and a loan modification. In most cases, forbearance only temporarily suspends your obligation to make your mortgage payment. The general term of suspension right now seems to be 90 days but it can be as much as one year, or as little as 30 days. With a forbearance option, you will be expected to pay back the amount you owed, but did not pay. That can mean a big, ugly balloon payment, required by your lender at the end of your forbearance term. This option will likely be very problematic for most people who aren’t able to come up with the funds for the balloon payment.

Do not assume that the amount you owe, will be added to the “back end” of your loan. Some lenders are expecting this payment at the end of your suspension period! Our advice is to ask detailed questions of your lender and make sure you understand the expectations of how and when you repay the amount you owe.

Be sure to ask what happens if you still are unable to pay your mortgage payment, once the forbearance term runs out. Find out what your options will be in advance if possible.

How Loan Modification Works

A loan modification is a negotiation undertaken with your lender to renegotiate the terms of your loan. That can mean a principal reduction, a lower interest rate, or an increase in the length of time the bank will allow you to pay back the loan. This will be the option you need if you are facing long-term financial hardship and can document your long-term hardship. If you can show your lender proof of a lengthy period of hardship, you may be able to change the terms of your loan to reduce your payments in some way, or your overall obligation.

Keep paying any amount you can towards your monthly mortgage payment. Even a small monthly payment sent to your lender, will put you in a better bargaining position, versus just stepping out. Showing your lender that you are responsible and trying to work out a payment plan, is a good negotiating tool.

Many lenders will want you to start with a forbearance option before offering you a loan modification. Keep as much documentation as you can regarding your hardship. Plan to speak with an attorney or a reputable loan modification company to assist you in your negotiations. A little money spent up front for knowledgeable counsel can save you a lot in the long run.

Please call us if you find yourselves in this position. We can help direct you to the appropriate professional to help you make a plan that will get you through these difficult times.