Loan Modifications for borrowers can come in many different forms. This article will describe some of these, and borrowers may consider some of them when working with their lender. Most are shorter term solutions that will help borrowers recover from a financial hardship and become current on their mortgage once again. The type of loan modification received will generally depend on the borrower’s circumstances and what the lender is willing to consider.

Loan Modification Options

Forbearance

A forbearance is when the lender temporarily suspends or reduces payments for the borrower, perhaps to get them through a short-term financial hardship. It differs from other types of loan modifications in that the lender expects to be recoup the full difference at the end of the forbearance period. This may be done in a lump sum or in installments. In other loan modifications, the amount payments are reduced is typically added to the end of the loan, and paid off when the loan matures or the property is sold.

Interest Rate Reduction

This is where the lender reduces the rate of the loan, either temporarily or for the full term of the loan, depending on the modification. The interest income that the lender gives up during the rate reduction will often be added to the principal of the loan.

Loan Extension

This is a change in the length of the term of the loan. The term may be extended from 30 years to 40 years.

Partial Claim

This is specifically for FHA (Federal Housing Administration) insured loans, and is for borrowers that are at least four months delinquent on the property in which they live. The borrower must be able to document the hardship that caused them to miss the payments. They must also be able to prove that they are now capable of making the full mortgage payment, and are unable to make up the missed payments and fees. The fees and missed payments incurred before the loan modification are rolled together into a zero interest second mortgage, and are due when the property is either refinanced or sold.

Principal Deferral

This is where the lender will modify the loan in such a way as to lower the payments, but will also reduce the amount of principal that is paid off with each payment. The deferred principal is due when the property is refinanced or sold, or when the loan matures.

Reinstatement

This is not actually a loan modification itself, but is the term used to describe when a delinquent mortgage is made current by the borrower. This means they have caught up on all of the missed payments and paid all the late/missed payment fees that the lender has imposed. The borrower may still have suffered damaged credit, but the foreclosure process is stopped.

Repayment Plan

This is where the borrower and lender, prior to foreclosure, come up with a repayment plan that will get the borrower current on both payments and fees. This usually involves an upfront payment of some percentage of the amount that is delinquent, then increased payments until the debt is made current.

Published on February 19, 2014