Loan Modification, Forbearance, and Missed Payments

Homeowners facing foreclosure often dig themselves into a deeper hole by agreeing to unaffordable repayment plans. It’s a shame that lenders even pitch such plans, because they ultimately lead borrowers on the path to failure. Recently, a visitor to KeepMyHouse.com described a situation that’s a classic case of a servicing company setting up the homeowners for failure.

Question: We are currently with Litton Loan Servicing and have had a foreclosure started…. We contacted them and have gotten a forbearance agreement that raises the payment $200.00, not lowered it. We are also upside down because of the market and all the fees associated with their attempt to foreclose. We have made 4 payments at the higher amount but can’t keep borrowing to do this. Can we mitigate with the attorneys you recommend or is that not possible until we start missing payments? We are employed but our income has dropped as we are self employed in the health care field.

Answer: Forbearance is not a loan modification. Forbearance is a repayment plan – an installment plan to catch up on late and missed payments and any penalties associated with them. As such, forbearance is a viable option only for homeowners who have recovered from a temporary financial setback and now have sufficient income to cover both their original monthly house payment plus an extra payment to catch up on late and missed payments.

Your situation, as you describe it, makes you a poor candidate for forbearance. Assuming your lender knew the details of your financial situation, it should have never offered you a forbearance agreement. As you explain, you are now having to borrow money to afford the higher payments. This is not a sustainable situation.

Based on the scenario you’ve presented, yes I think you would be a good candidate to re-negotiate your monthly payment. A loan modification requires in its barest and most basic form, three elements:

  1. A verifiable hardship (reduction in income)
  2. Affordability (some income to make a house payment, albeit it a lower payment)
  3. Mitigation of lender-losses (the lender stands to lose less money through loan modification than foreclosure)

Without knowing more, you appear to meet the first two eligibility requirements. Now whether it’s less expensive for the lender to modify than to foreclose; I don’t know. Don’t wait until you’ve defaulted on the forbearance agreement to try to get a loan modification. Start by contacting your servicer immediately or employ the services of a third-party to do it for you (preferably an attorney experienced with loan modification). Make sure you tell any third party that you currently have a workout in place, but it’s not affordable because of a reduction in household income.

Many homeowners mistakenly believe that they cannot qualify for a loan modification until they have missed one or more payments. Theoretically, this is not true, but in practice, lenders often refuse to consider a loan modification until a homeowner has missed one or more payments.

If you are having trouble making your mortgage payments due to a qualifying and verifiable financial hardship, you should take action sooner rather than later. The sooner you act, the more options you have available and the more time you have to pursue those options. Under president Obama’s plan, the loan may not have to be in default for homeowners/borrowers to qualify for relief, but the details of this plan and its implementation are still unfolding. Don’t assume the answer is no… call your lender to find out or work with a qualified attorney to find out for you.

Ralph R. Roberts, GRI, CRS
Award-Winning REALTOR® and Author
Loan Modification For Dummies (avail. Summer 2009)

3 Comments

  1. Lillie Says:

    My husband and I are coming up on being behind on our mortgage payment by 4 months. We have asked for a loan modification. Our lender has just finished with the paperwork and said that they have given us a repayment plan. I haven’t received it yet, but they said we have five days to sign and get it back to them. If the payment is higher than the original payment, should we sign this? I have been out of work for 1 year taking care of my son who became paralyzed and am having a hard time getting another job. I’m not sure if they gave us a modification or just a repayment plan. Can you help?

  2. Jane Says:

    I was laid off in January, my husband in February. We make $4000 together on unemployment. By selling things, tax return, and cashing in things we have been able to make our housepayments, and small amounts toward our bills, so far. But, in April, we will not have enough money - the house payment is $2900. My husband has been working a few hours now as the weather is getting warmer and will probably go back to work soon, but my job was a permanent layoff (more than half our income). I have had a hard time finding other work. I have had people tell me to just not make the housepayment and I will qualify for the Obama plan — but, I don’t know if this is true. Could you give me some advice? Thanks.

  3. Don Says:

    Don…

    I am afraid I can’t see the point of this!…

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