Forbearance versus Modification
During the COVID-19 epidemic, many mortgage servicers are reaching out to their homeowners offering them help with their mortgage payments. Some are offering mortgage forbearance and some are offering mortgage modifications or another term, mortgage moratorium. But what do these terms mean? We’re here to help explain the difference between them.
What is a Mortgage Modification or Moratorium?
A mortgage modification or mortgage moratorium is when you request from your mortgage servicer to modify your mortgage loan agreement with them. When you purchased your home, you signed a legal document called your mortgage note. Your mortgage note was an agreement between you and your servicer stating you would repay your loan at the agreed upon amount, term and interest rate. When you ask your servicer for a modification, you are asking them to modify or change those terms. In most cases your servicer will ask that you complete an application for these changes. If they agree to modify your agreement with them, there are a few different ways they could do that. Your servicer could lower your interest rate, set up a repayment plan or extend the number of years you have on your mortgage loan. For example, if you have been in your home for 10 years and you only have 20 years left on your loan, they could extend it back out to 30 years, which would allow for lower monthly mortgage payments.
What is Mortgage Forbearance?
A mortgage forbearance is a period of time your mortgage servicer allows for you to not make your mortgage payments. Some servicers will offer as little as 3 months and can go up to 12 months of you not having to make your mortgage payment. Most servicers are also waiving late fees and are not reporting to the credit agency on the missed payments during your forbearance term. All great news! One of the down falls of the forbearance is in most cases after your mortgage forbearance term has expired, your servicer will ask for you to make a one lump sum payment to pay back all the payments you missed during your forbearance. What this means is if you had a forbearance of three months, at the end of the three months your servicer will ask that you make a lump sum payment of all three of your missed payments during your forbearance. For some people this may be possible to do but for most it will not be possible. At this time your servicer may allow for you to file a mortgage modification (or moratorium) which would allow you to set up a repayment plan or in some instances will add the payments to your loan and make them due at the end of your mortgage loan.
Which Option is Best for Me?
This question can only be answered after a conversation with your lender. Based on the options they are able to offer you, your current situation, and the terms of your loan, they should be able to help you decide how to deal with any challenges you are facing because of a temporary inability to make your mortgage payments. Whichever option is best for you, one thing will always be true…your servicer wants to help and is there to help you through these unprecedented times. If you are having a hard time making your payments, be sure to call your servicer and explain your situation. They will work with you and find the best option available to get you through this time.
Unsure of Where to Start?
Our NeighborWorks HomeOwnership Center staff is always happy to take your call and help get you with any general questions you might have. To learn more about mortgage moratoriums and mortgage forbearance please visit our HomeOwnership Center's page. And as always, reach out to one of our HomeOwnership staff if you have questions!