Forbearance agreements, repayment plans, and loan modifications are mortgage workout options that borrowers can use to avoid foreclosure. In a forbearance agreement, the loan owner (“lender”) agrees to reduce or suspend your payments for a set amount of time. With a repayment plan, the lender temporarily increases your monthly payment by adding part of the overdue amount to your current payments so that you can get caught up on the loan. In a modification, the lender typically lowers your monthly payment and brings the loan up to date by adding any past-due amounts to the balance of your debt.
How Forbearance Agreements Work
While a loan modification is a permanent solution to unaffordable monthly payments, a forbearance agreement provides short-term relief for borrowers. With forbearance, the lender agrees to reduce or suspend mortgage payments for a while. During the forbearance period, the servicer (on behalf of the lender) won’t initiate a foreclosure. In exchange, the borrower must resume making the full payment at the end of the forbearance period, and typically get current on the missed payments, including principal, interest, taxes, and insurance. You can usually:
• pay the 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.
The specific terms of a forbearance agreement will vary from lender to lender. If a temporary hardship causes you to fall behind in your mortgage payments, a forbearance agreement might allow you to avoid foreclosure until your situation gets better. In some cases, the lender might be able to extend the forbearance if your hardship isn’t resolved by the end of the forbearance period to accommodate your situation. In a forbearance agreement, unlike a repayment plan, the lender usually agrees in advance for you to miss or reduce your payments.
Repayment Plans: Getting Caught Up on Past-Due Amounts
If you’ve missed some of your mortgage payments due to a temporary hardship, a repayment plan might provide a way to catch up once your finances are back in order. A repayment plan is an agreement to repay the delinquent amounts over time.
Here’s how a repayment plan works:
• The lender spreads your overdue amount over a certain number of months.
• During the repayment period, a portion of the overdue amount is added to each of your regular mortgage payments.
• At the end of the repayment period, you’ll be current on your mortgage payments and resume paying your normal monthly payment amount.
The length of a repayment plan will vary depending on the amount past due and on how much you can afford to pay each month, among other things. A three- to six-month repayment period is typical.
A Modification Permanently Changes the Loan Terms
A loan modification is a permanent restructuring of the loan where one or more of the terms are changed to provide a (hopefully) more affordable payment. If you’re currently unable to afford your mortgage payment due to a change in circumstances, but you could make a modified payment going forward, this option might help you avoid a foreclosure.
How the Lender Adjusts Your Payment
With a modification, the lender might agree to do one or more of the following to lower your monthly payment:
• reduce the interest rate
• convert a variable interest rate to a fixed interest rate
• extend of the length of the term of the loan, or
• forbear some of the principal balance. (“Forbearing” the principal means setting aside a portion of the total debt before calculating your monthly payment. The borrower typically has to pay the set-aside portion in a balloon payment when refinancing or selling the home, or when the loan matures.)
How to Qualify for a Modification
Generally, to get a loan modification, you must:
• provide all required documentation to the servicer for evaluation (required paperwork will likely include a financial statement, proof of income, most recent tax returns, bank statements, and a hardship statement)
• show that you can’t make your current mortgage payment due to a financial hardship, and
• complete a trial period to demonstrate you can afford the new monthly amount.
Different Kinds of Modifications
Many different loan modification programs exist, including proprietary (in-house) loan modifications, as well as Fannie Mae and Freddie Mac Flex Modifications. Other special modification programs are also available for certain kinds of loans, like FHA-insured loans.
Voluntarily refraining from doing something, such as asserting a legal right. For example, a creditor may forbear on its right to collect a debt by temporarily postponing or reducing the borrower’s payments.
Most mortgage lenders will initially try to entice borrowers with a “forbearance agreement.” This type of arrangement calls for the borrower to “catch up” the back payments, fees, and interest over a very short period of time (usually three to twelve months). The result is a much higher monthly mortgage payment. Additionally, lenders usually ask for a large lump sum up front to initiate a forbearance agreement.
Forbearance Does Not Stop Foreclosure
A forbearance agreement with the mortgage lender’s loss mitigation department usually does not take the borrower out of foreclosure. Forbearance simply causes the bank to “postpone” or “continue” the foreclosure sale until the payments are completely caught up. If the borrower does not comply with the exact terms of the forbearance agreement (a few days late, a few dollars short), the foreclosure sale takes place immediately (often within days). Forbearance agreements are essentially a way for mortgage lenders to squeeze more money out of a borrower. Due to the loose California foreclosure laws, lenders often disguise a last grab at the borrowers’ money as a “workout plan” for the loan, knowing they will be foreclosing on the property anyway. Forbearance agreements are stacked against the borrower and almost always result in foreclosure. Most borrowers would be better off with just about any type of arrangement, other than a forbearance agreement. In rare cases, the lender may offer an affordable forbearance agreement, but it quite uncommon. Many of the bankruptcy cases filed by this office are the result of borrowers entering into forbearance agreements with mortgage lenders without understanding the implications.
Loan Forbearance Basics
When a debtor defaults on a loan, the lender can opt for three distinct types of collection action. They may seek to foreclose on the loan and collect any collateral that a debtor used to secure the loan. Or they may amend the loan agreement for different terms. In addition, they may agree to a forbearance agreement. Forbearance will allow the borrower to withhold payments on the loan for a specified amount of time and then resume making payments
The Difference Between Forbearance and Amending a Loan
There is a very specific difference in granting forbearance and amending the terms of a loan. For example, if the maturity date of a loan comes due and the debtor has not fully repaid the loan, the lender can change the terms of the loan to extend the maturity date. By making this amendment, the lender has ensured that the loan does not enter into default and that he or she keeps the terms of the loan in place. When the lender amends the loan, the debtor must still make payments according to the terms of the original loan. When a forbearance agreement has been issued, the parties temporarily put the terms of the loan on hold. By entering into a forbearance agreement, the borrower states that they have defaulted on the terms of the loan. However, through this agreement, they agree to resume the payments on the loan after the forbearance period. In return, the lender acknowledges the default but refrains from pursuing collections during the forbearance period. In many cases, the lender will attach certain conditions to the loan and the borrower for allowing the forbearance. These may include continued interest accrual during the forbearance period, repayments at a higher interest rate when the loan resumes, or additional security for the loan. If the borrower does not resume payments on the loan at the specified date, the lender will be able to sue for breach of contract and collect the debt on the loan under the terms of the original loan agreement.
Before Granting Forbearance
Before granting forbearance, there will be a complete investigation of the financial standings of the borrower. In addition to checking finances and credit ratings, the lender should conduct a search for liens, tax liens, or other judgments against the borrower to gain a complete view of their finances. In addition, a survey will be conducted to ensure that all collateral is still in place to secure the loan. The forbearance agreement will contain many legal stipulations.
Loan Is in Default
First, it must contain the information stating that the loan in question is in default and that the borrower admits to this default. It must also include information that the lender is in full rights to claim a summary judgement against the borrower if the loan is not repaid. This gives the lender the right to collect on the debt if the forbearance is not honored.
Legal Conditions of the Forbearance
The next thing that you must include in this document is legal conditions of the forbearance. This will state that this contract is only in effect if the borrower agrees to, and honors all of, the conditions in the forbearance agreement. This section will also include information that states what will happen if the parties do not honor the forbearance agreement. In most cases, it will state that the loan will enter into default. Moreover, it will state that full collections on the loan will begin immediately.
Conditions of the Loan in Relation to Security
The third part of the agreement will specify any conditions of the loan in relation to security. If the loan was previously secured by property or goods, or if the forbearance requires a security deposit, the terms will be defined. The borrower must agree to all the terms and provide the necessary security before finalizing the agreement. All parties should carefully review this part of the agreement.
Release of Liability
The final section of the agreement will give a release of liability to the lender from all other parties. This release will cover any loss or damages caused by the forbearance agreement, loan documentations, or any other actions taken during the process. This section protects the lender from any “backlash” from the borrower.
Benefits of Forbearance
Forbearance has many benefits for both the borrower and the lender. Lenders get an admission of default from the borrower. This admission will stand in court as a reason to collect the debt with aggression. The borrower, if granted forbearance, gets a second chance to pay off their debt without much damage to their credit history. Forbearance is not for everybody or applies in every situation. There must be a willingness and ability for the borrower to repay the debt at a later time for this type of legal action to work. If the debtor does not foresee the ability to repay in the future, or negates the deal, the creditor has their admission of default and can aggressively collect the debt.
Mortgage Forbearance Agreements vs. Loan Modifications
While a mortgage forbearance agreement provides short-term relief for borrowers, a loan modification agreement is a permanent solution to unaffordable monthly payments. With a loan modification, the lender can work with the borrower to do a few things (such as reduce the interest rate, convert from a variable interest rate to a fixed interest rate or extend the length of the loan term) to reduce the borrower’s monthly payments. In order to be eligible for a loan modification, the borrower must show that he or she cannot make the current mortgage payments because of financial hardship, demonstrate that he or she can afford the new payment amount by completing a trial period and provide all required documentation to the lender. The documentation the lender requires could include a financial statement, proof of income, tax returns, bank statements, and a hardship statement.
Forbearance Agreements and Repayment Plans
A loan modification is often the most stable alternative to a foreclosure if you are struggling to keep up with your monthly payments. However, if a loan modification is not an option for you, a forbearance agreement or a repayment plan may be a feasible solution. These arrangements are temporary, in contrast to the permanent solution offered by a loan modification. They may be appropriate when you have not fallen far behind in your payments and expect your financial situation to improve in the near future. On the other hand, if you do not foresee any improvement in your ability to make monthly payments, you probably should pursue a different alternative to a foreclosure, such as a short sale or a deed in lieu of foreclosure.
While a forbearance agreement is arranged in advance to cover a certain period, a repayment plan is arranged after the homeowner has missed payments already. It accounts for a temporary hardship that has been resolved rather than a temporary hardship that is starting or ongoing. Depending on the amount that is overdue and your record of past payments, a lender may be willing to let you spread out the missed payments over a certain period. It will add a percentage of the overdue amount to each regular monthly payment during that period, and you will need to pay the total amount. Once you have completed each of these enhanced payments, your monthly payment amount will revert to the original rate. Repayment plans may last for a few months or close to a year. The length will depend on how much the homeowner can pay. If you need assistance in negotiating a repayment plan, you can get advice from a counselor approved by the Department of Housing and Urban Development (HUD) or an attorney. As with forbearance agreements, the main drawback to a repayment plan is simply that it is only a temporary measure. If you fall behind on your payments again, the lender will be able to start the foreclosure process, and it may be less willing to agree to one of these alternatives a second time.
Notices in a Non-judicial Foreclosure in Utah
Utah foreclosures tend to be non-judicial, which means they happen outside of court. Judicial foreclosures, which go through the court system, are also possible. Because foreclosures in Utah are typically non-judicial, this article focuses on that process.
Notice of Intent to File a Notice of Default (Pre-foreclosure Notice)
Before the bank or servicer (the company that handles mortgage accounts on behalf of the bank) can officially start the foreclosure, it must mail the borrower a notice of intent to file a notice of default. This pre-foreclosure notice must include, among other things, information about:
• who the borrower can contact to find out about getting a loan modification or other foreclosure relief, and
• provide 30 days to pay the amount due to cure the default and avoid the filing of a notice of default.
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