Stopping Foreclosure With a Forbearance Agreement, Repayment Plan, or Loan Modification

If you’re struggling to make your mortgage payments—or are already behind—you might be able to avoid losing your home to a foreclosure with a:

• forbearance agreement
• repayment plan, or
• loan modification.

In a forbearance agreement, the lender agrees to reduce or suspend your monthly mortgage payments for a set period. With a repayment plan, though, the lender temporarily increases your payments by adding part of past-due amount to upcoming payments. When you complete a loan modification, the lender agrees to adjust the terms of the loan to, hopefully, reduce what you have to pay each month and typically adds overdue sums to the loan balance.

Read on to learn how each of these options works.

How a Forbearance Agreement Works

With a forbearance agreement, the lender usually agrees in advance to lower your monthly payment or for you to skip making some payments altogether. In some circumstances, though, you might be able to work out a forbearance even if you’re already behind.

Generally, a forbearance will last from three to six months. You might be able to get a longer one depending on your situation, lender or investor guidelines, and applicable law. For instance, under section 4022 of the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, borrowers with federally backed mortgage loans get the right to ask for (and get) a forbearance of up to up to 180 days. The forbearance can be extended for up to an additional 180 days. This forbearance applies to residential properties designed principally for the occupancy of from one to four families. If you want this kind of forbearance, you should make your request before the sooner of December 31, 2020, or the termination date of the COVID-19 national emergency declaration. (The CARES Act also provides a 30- to 60-day forbearance option for multifamily-mortgage loan borrowers with federally backed loans experiencing coronavirus-related hardships.)

When the forbearance plan ends, you then resume making payments. You’ll also have to get caught up on the total you didn’t have to pay during the forbearance. To repay the overdue amounts, you can:

• pay a lump sum
• pay extra each month until you’re current, or
• complete a loan modification in which the lender adds the unpaid amount to the balance of the loan.

Your repayment options depend on what entity owns or insures your mortgage loan.

How a Repayment Plan Works

If you fell behind in mortgage payments due to a temporary money-flow issue but are now financially stable, you might be able to get current through a repayment plan. Or you might enter into a repayment plan after a forbearance.

With a repayment plan, you must pay a fraction of the overdue amount each month on top of your regular mortgage payment. For example, say you didn’t pay your $1,500 mortgage payment for four months, so you’re $6,000 behind. The lender might allow you to pay $1000 extra each month over the next six months to get caught up. You’ll then have to pay $2,500 each month for the next six months. At the end of the repayment plan, you go back to making your regular payments of $1,500 every month.

A repayment plan might last for three, six, or nine months, but probably not longer. Most people have trouble making increased mortgage payments for an extended period.

How a Loan Modification Works

In a loan modification, the lender adjusts the terms and conditions of your loan. For instance, the lender might reduce a fixed-interest rate, convert a variable interest rate to a fixed rate, or extend the term of the loan (how long the loan lasts). By taking one or more of these actions, the lender is usually able to lower the monthly payments to a more affordable level. As part of a modification, the lender typically adds delinquent payments, plus fees and costs, to the loan balance. The delinquent amount might then come due in a balloon payment when the loan matures, or when you refinance or sell the property. Or the lender might extend the term of the loan and reamortize the debt.

To qualify or a modification, you’ll probably have to prove that while you can’t afford your current mortgage payments due to a financial hardship, you can make lower monthly payments. As part of the modification process, you’ll likely have to complete a trial period, usually for around three months, to show you can keep up with the new, lowered payments. If you successfully make all of the trial period payments, you’ll get a permanent modification.

The type of modification you can get depends on what entity, like the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), Fannie Mae, or Freddie Mac, owns or guarantees your loan and whether you meet eligibility requirements. These entities offer different programs. For example, Fannie Mae and Freddie Mac, which are government-supported enterprises that own or guarantee many mortgages, offer Flex Modifications. This kind of modification can lower an eligible borrower’s mortgage payment by as much as 20%. Loan modifications are available for FHA- and VA-insured loans as well. Also, almost all lenders offer proprietary (in house) modifications to borrowers who qualify.

Getting Help With Mortgage Payments

To find out if you qualify for a forbearance agreement, repayment plan, or loan modification, call your mortgage servicer (the company that handles the loan on the lender’s behalf). If you need more information about different ways to avoid foreclosure and your rights in the process, consider talking to a lawyer or a (free) HUD-approved housing counselor.