Understanding loan modifications

What’s the difference between a loan modification, a forbearance agreement and a repayment plan?

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Each of these options is designed to help homeowners in different situations.

A loan modification permanently changes the terms of your mortgage so you can become current on your mortgage again. Usually that means lowering your monthly payment—but that’s not always the case. For example, if you went through a period of financial hardship and got behind on payments, but now you can afford your mortgage payment, your bank can restructure your loan so your payments are the same or maybe even a bit higher—but you’ll be current on your loan and will stop having to pay late fees or (worse) lose your home to foreclosure.

Usually the mortgage loan is modified by 1) reducing the interest rate so payments go down, 2) converting from a variable interest rate to a fixed interest rate, or 3) extending the length of the term of the loan (for example, making a 30-year mortgage into a 35-year or 40-year mortgage).

With a forbearance agreement a mortgage lender agrees to reduce or suspend the payments for a set period of time, so you can get some short-term relief. Under a forbearance agreement, the lender agrees not to initiate foreclosure during the forbearance period.

Finally, a repayment plan is a good option for you if you have missed one or more payments because of a temporary hardship. Under a repayment plan, a lender will spread the overdue amount over a certain number of months.

At the end of the repayment period, you will be current on your mortgage again and you will resume paying the normal monthly amount due under the terms of the mortgage.

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