In this blog, we will cover the difference between mortgage forbearance versus loan modification. We will also cover and discuss the forbearance Coronavirus Law implemented during the outbreak by President Donald Trump. President Trump signed the $2 trillion stimulus package forbearance relief package for homeowners on March 27th, 2020. The former President signed the stimulus package to avoid further damage to the US economy from the nasty contagious deadly coronavirus pandemic. In the following paragraphs, we will cover the difference between forbearance versus loan modification and what the impacts are when it comes to getting a new mortgage.
Is A Forbearance The Same as a Loan Modification?
Included in the $2 trillion coronavirus package is a relief for unemployed homeowners where they can instantly get a forbearance. Homeowners who are laid off, fired, and/or unemployed for one reason or another due to the pandemic are eligible for a forbearance of up to 12 months.
What this means is they are exempt from paying their mortgage payments to their lenders during the coronavirus pandemic while they are not employed.
Mortgage Forbearance Versus Deferment
Under federal law, lenders cannot report these borrowers late on their credit report. Therefore, it will not negatively impact their credit. Many homeowners are often confused between forbearance and loan modification.
The main purpose of this law was to prevent a flood of foreclosures due to non-payment. In this article, we will discuss and cover the benefits and differences between Forbearance Versus Loan Modification During Coronavirus Pandemic.
What Is Considered Forbearance Versus Loan Modification
The difference between forbearance versus loan modification is that a forbearance, the lender will suspend the mortgage payments from borrowers for a short period of time. The terms of the mortgage such as the interest rate and terms remain the same. Forbearance versus loan modification is very different. With a forbearance, there is no mortgage payment forgiveness. Another difference between forbearance versus loan modification is the terms of the loan do not change.
What Is a Loan Modification?
What Is A Loan Modification? What is the main difference between forbearance versus loan modification? A loan modification is a change to the original terms of your mortgage loan. Unlike a refinance, a loan modification doesn’t pay off your current mortgage and replace it with a new one. Instead, it directly changes the conditions of your loan.
Once the forbearance period is over, the borrower needs to pay the mortgage payments missed during the forbearance period. The missed mortgage payments during the missed payment period are not forgiven and need to be paid back.
Do The Missed Payments Need To Get Paid Back on Forbearance?
There are various ways the missed payments can be paid back. It depends on the lender on how they structure the mortgage forbearance. Some may require borrowers to pay back in one lump sum. Other lenders may spread the missed payments over a certain period of time
Before signing into a forbearance agreement, go over the terms of the forbearance with your mortgage servicer. Millions of Americans lost their jobs due to the coronavirus pandemic. The US economy is temporarily shut down due to this deadly contagious pandemic. Millions of homeowners are expected to apply for forbearance with their mortgage services due to the economic meltdown in the US. A forbearance benefits homeowners who are temporarily laid off for one reason or another and are expected to return back to work with the same pay and terms from their employer.
What Is Better Between a Forbearance Versus Loan Modification
Another difference between forbearance versus loan modification is a loan modification can be construed as a foreclosure or similar to foreclosure by many lenders. A loan modification is a form of restructuring a home mortgage. Loan modifications benefit borrowers who had a drastic reduction in their household income and can no longer afford their current mortgage payment.
Is a Loan Modification an Alternative To Foreclosure/
In order to avoid foreclosure, they need to modify their current mortgage payments to a lower monthly payment schedule. The lender works with a borrower who needs a mortgage modified due to various financial reasons.
You can qualify for a mortgage with little to no waiting period after forbearance. You may need to wait a waiting period after loan modification.
How Do You Qualify For a Loan Modification To Avoid Foreclosure?
The borrowers need to be employed to qualify for a loan modification. The lender may reduce the interest rate, forgive the amount in arrears, or extend the term of the loan. Lenders do not want to foreclose. Lenders would rather take a loss and modify a loan and have the borrower make timely payments. Lenders will initially allow borrowers to miss their current mortgage payments for a short period of time until a new payment structure is set up.
What Are The Negatives of Forbearance Versus Loan Modification?
The ability to repay the new loan after the modification is the most important factor for lenders granting a modification. There are various ways the lender can set up a new loan in a loan modification. They may lower the interest rate and extend the payment terms to lower the monthly payments.
They may add the missed payments to the end of the mortgage term and extend the life of the loan. Homeowners who will be getting a permanent wage cut due to the coronavirus pandemic may need to request a loan modification versus a forbearance from their lender.
How The $2 Trillion Coronavirus Stimulus Helps Unemployed Americans
The $2 trillion stimulus bill was signed into law by President Trump on March 27th, 2020 to halt the economic meltdown during the coronavirus pandemic. This is phase three of the stimulus package. Included in this package are unemployed homeowners who can ask for forbearance for up to 12 months.
How Do I Request For a Mortgage Forbearance?
Americans can also ask for forbearance from their student loan providers and on their car loans. All federal debt payments are eligible for forbearance for unemployed workers.
Fannie Mae and/or Freddie Mac-owned properties are halted from foreclosure sales and evictions until May 17th and/or further notice. Creditors cannot report consumers to credit reports while they are on forbearance and/or exempt from paying their monthly debts. Unemployed workers can instantly qualify for making their mortgage payments for up to one year.
What Experts Advise Between Forbearance Versus Loan Modification
Mike Gracz of Gustan Cho Associates said the following:
The good news is mortgage lenders are quickly making accommodations. Mortgage giants Fannie Mae andFreddie Mac both have ordered lenders to be more flexible with borrowers, reducing or suspending payments for up to 12 months. That action alone covers half of the country’s home loans. Other mortgage lenders are likely to follow suit eventually. But if your lender hasn’t set new policies yet and you’re facing an immediate mortgage crisis, there are steps you can take. First off, and most importantly, don’t just stop paying your mortgage. Reach out to your lender and work with them to create a payment plan. That’s as easy as making a phone call. Check with your lender to see if this might be the case. Both Fannie Mae and Freddie Mac are ordering lenders to work with borrowers on a permanent plan to maintain or reduce monthly payments as necessary.
The mortgage industry is in major chaos. Many lenders have canceled mortgage rate locks and clear to close on lower credit profile borrowers. All non-QM lenders have suspended operations until further notice. Angel Oak Mortgage Solutions, one of the largest non-QM lenders, has laid off 200 out of their 275-man workforce and suspended operations for the next two weeks. Yet other non-QM lenders have gone out of business.
Resource For America’s Largest Mortgage Servicers
Whoever your mortgage servicer is, contact them directly if you are not able to make your mortgage payments due to unemployment. Last week’s unemployment claims came in at over 3 million. This week is expected to be higher. Unemployment is expected to continue until the coronavirus outbreak is under control and a cure has been developed. Below are the largest mortgage services in the US:
- Bank of America
- Wells Fargo Customers can call 800-869-3557 to discuss their options
- TD Bank The bank has specialists standing by at 800-222-5522
This breaking news is a developing story. Gustan Cho Associates will keep our viewers updated on upcoming developments in the coming days and weeks. Stay Tuned!!!
This blog on what is the difference between forbearance versus loan modification was updated on November 5th, 2022 by Ronda Butts of Gustan Cho Associates
November 5, 2022 - 6 min read