The inability to make mortgage payments can be taxing on homeowners. From job layoffs to unexpected medical expenses, any hardship can warrant the need for assistance. Thankfully, other options besides foreclosures exist to help homeowners get back on their feet and avoid losing their homes.

Just like you, banks and lenders do not want to foreclose. The process is long and arduous and costs them money. If you are suffering from a financial hardship you can prove, lenders will work out the best option for you. They will offer either forbearance agreements or loan modifications to help relieve your financial burden and also help you avoid foreclosure. Though both will serve to lower your mortgage payments, they are very different in principle.

Forbearance

Forbearance is a delay on a foreclosure due to a temporary financial hardship on the part of the homeowner. If you suffered a recent financial loss due to a temporary setback and you were not able to make your mortgage payments, forbearance may be the best option for you.  With forbearance you can negotiate a specific amount of time to allow you to catch up on payments. Most forbearance agreements involve a 6 to 12 month period where you will be required to pay a portion of the delinquency initially and then a percentage in addition to your regular monthly payments. You can also skip payments as well.

Some forbearance agreements will allow you to temporarily avoid paying for a period of time. Usually the unpaid principal and interest is either due after a specified period of time or added to the loan balance and due in full when the loan closes.

Loan Modification

When your financial instability is the result of a long term issue, such as bankruptcy, loan modification may be the best option to prevent the possibility of foreclosure.

Loan modification is more complex than forbearance. Essentially you are “modifying your loan” instead of simply prolonging payments. Under a loan modification, the features of your loan are adjusted, such as interest rate, monthly payments, and time periods. The lender will agree to reduce your interest rate to a specified amount based on your current income.

How to Decide Between Forbearance and Loan Modification

1. Forbearance is ideal for homeowners who suffer a temporary financial loss due to unemployment, medical conditions or a natural disaster. In order for a lender to approve a forbearance application, you must prove that your financial hardship will resolve at a specified time in the future. In addition to disqualifying circumstances, forbearance agreements are often rejected because homeowners do not possess enough equity. Your lender may not feel comfortable adding principal and interest on to the end of the loan if you do not have enough equity to cover these costs should your financial burdens continue to escalate.
If you are interested in forbearance, you must convince your lender you can pay back the fees and money due once the forbearance period concludes. If you signed a forbearance agreement with a lender and you miss a payment, you may end up in a foreclosure situation and lose your home.

If you experienced financial instability in the past, it can happen again. This would of course depend on your unique situation. Forbearance can take you from missing payments to a deeper state of debt and possibly foreclosure if your circumstances do not necessitate the need for this process.

2. A loan modification will allow you to adjust the features on your loan without halting payments. With this option, the loan will be modified to terms you can afford. Though a loan modification may seem like a great option, lenders often tack on fees and requirements that are not in the best interest of the homeowner. Before you jump into a loan modification, consult with a qualified professional.

Ask for Help

Your knowledge of the process is essential when negotiating these contracts since one mistake or overlooked detail could backfire on you. Though you may want to save money and tackle this process by yourself, this often results in money and time lost. The decision over whether to proceed with forbearance or a loan modification is one that takes some time and the expertise of someone who understands what lenders want to see and also what is required from you for approval.