The word “forbearance” is now commonly used in real estate lingo in Albuquerque. As unemployment rises and claims for unemployment rise, it’s possible a homeowner on a tight budget will have difficulty paying the mortgage. In most cases, unemployment compensation doesn't provide sufficient support to sustain someone for very long. It's not meant to do that. It's there to assist in offsetting the financial loss to the point where the householder re-enters the job market.

Forbearance means holding off your monthly mortgage payments for a while. Your lender and you must agree to a forbearance, as just stopping payments without the lender noticing what's going on would most likely trigger the foreclosure process. 

Lenders are reluctant to foreclose because foreclosing is costly and they risk being stuck with a property they never intended to own. Foreclosing a home and auctioning it can be long and costly. They'd rather work it out, and a forbearance is one way to do that. At the end of the forbearance, you have to pay up. The missed mortgage payments must be made up, meaning a large balloon payment can be looming in the near future.

A loan modification might be the better option. With a loan modification, the note is changed, or legally modified. However, any such decisions should be made with professional help, and advice. It is impossible, however, to alter the terms of a note without a modification or refinance. With a refinance, the new interest rate often can’t be lowered enough to qualify. With a loan modification, it’s different.

The lender will counsel the homeowner on how to change the note into something more affordable, and there are several options.

  • A reduction of the outstanding mortgage balance resulting in lower monthly payments. This is the least likely course of action.
  • Getting a lower-rate is another option. It may seem obvious but often it’s not a “forever” thing, but only for a short time.
  • Lenders might also agree to extend the term of the mortgage which will also lower the monthly payment. This also means more interest will be paid over the life of the loan.
  • A modification can mean switching from an adjustable rate mortgage to the stability of a fixed rate loan.

A loan modification involves completing an application for modification and providing financial information. The most important consideration is to make sure the homeowner can afford the newly modified loan. This means confirming the homeowner's income. If the modified loan provides a $1,500 monthly mortgage payment as a qualifying figure, the household will need to earn around $4,500 per month in gross income. 

Other modification plans will include a “trial modification”, which means the homeowner has to make the new payments on time for a certain period, say three months. After those payments are made on time, the existing note will be converted to a program that homeowners can afford.

If you have the choice, a modification might be the better option. But again, in such a situation, professional counsel should be on your plate.

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