Homeowners who fall on hard times and cannot afford their house payments may be able to negotiate with the lender to ease the financial burden. Options in such a situation include loan modifications, repayment plans, Chapter 13 bankruptcy filings and forbearance agreements. A forbearance agreement is a short-term solution that may reduce or eliminate your mortgage payment for a set time period.
TL;DR (Too Long; Didn't Read)
A mortgage forbearance is an agreement between you and your mortgage lender to either reduce your monthly payments or eliminate them altogether, but only for a short time.
How Home Loans and Mortgages Work
When you take out a home loan to buy a property or refinance one you already own, you must give the lender a mortgage on the property. A mortgage is a type of security interest. In most states, it means that although you own the property, the lender also has an interest in it that encumbers the home's title. If you sell the house, you have to pay the loan off.
A mortgage also means that if you don't pay the loan as promised, the lender can take the house from you and sell it to pay the debt. This is done through foreclosure.
What Is a Mortgage Foreclosure?
Foreclosure is the procedure by which a mortgage lender can sell your house if you default on your loan. Usually, the county sheriff conducts the sale. Notice of the sale is published, and private parties can come bid on the property, or the lender itself can buy the property back and sell it later.
Foreclosure Redemption Period
Some states offer homeowners a redemption period after a sheriff sale has concluded. The redemption period is the time period after a sheriff sale where you can still try to pay the mortgage in full. Some states don't offer a redemption period at all, while others have a very short period. However, some states have significant redemption periods.
Mortgage Foreclosure Process
Every state's laws are different with respect to how foreclosure is accomplished and whether there is a redemption period. Many states have judicial foreclosure, which is when a lender must file a court case to commence foreclosure proceedings. More than half the states, however, use non-judicial foreclosure in which the lender publishes a notice that it intends to sell the property at a sheriff sale.
Judicial Foreclosure Systems
States that use judicial foreclosure have a more lengthy process. For instance, in New Jersey, a lender is required to file a foreclosure lawsuit in the county where the property is located, and the case proceeds much like any other type of lawsuit. There may be litigation about the default, the amount due and whether the lender complied with state and federal laws related to residential foreclosure.
After the final judgment in foreclosure is entered, the lender can schedule the sheriff sale. New Jersey's redemption period is only 10 days; after that time, the house belongs to the sheriff sale bidder, and the owner can be evicted.
The states that do not use judicial foreclosure may have judicial foreclosure available, giving lenders a choice. In Michigan, for instance, judicial foreclosure is an option, but most lenders don't use it. Instead, they foreclose by notice, simply scheduling the sheriff sale and letting you know when it is. Foreclosure in Michigan can happen very quickly, although lenders do have rules and laws with which they must comply before actually conducting the sale.
Fortunately, Michigan also has a long redemption period – six months for most homes. The redemption period is expanded to one year if the property is on more than three acres and used for a farm, or if the owner paid down his mortgage by more than one-third.
If your house is sold at sheriff sale, you still have that redemption period to try to save it by getting a new loan and paying off the lender. If someone bought your house at sheriff sale, he has to wait until the end of the redemption period to evict you.
Ways to Avoid Mortgage Foreclosure
If you're having difficulty keeping up with your mortgage payments and you're worried about foreclosure, your lender may be willing to work with you. The most common arrangements between a mortgage lender and a struggling homeowner include (in order of severity):
- Forbearance agreements.
- Repayment plans.
- Loan modifications.
Chapter 13 bankruptcy may also be an option if your lender has refused to negotiate with you and is going forward with foreclosure.
Mortgage Forbearance Agreements
A forbearance agreement is an agreement between the lender and the borrower that the lender will take either reduced payments or no payments at all for a set duration. The lender agrees that it will forbear from beginning foreclosure proceedings. In return, the borrower makes the agreed-upon payments for the agreed-upon time period, and when the time is over, regular payments resume.
Forbearance agreements are a starting point if you're floundering at the moment but if you believe that you can get back on track in fairly short order. However, the amounts unpaid during the forbearance period don't go away. You'll have to come up with the money in the manner set forth in the agreement.
Mortgage Forbearance Agreement Example
An example of a forbearance agreement is if John Q. Public is forced to take an unpaid medical leave from his job. He knows he'll be out of work for three months, and without his job, he can't afford to make his mortgage payments and still buy food, medication and other necessities. His mortgage payment is $1,000 per month.
He talks to his lender and explains his situation, providing documentation of his medical condition and the terms of his leave. The lender agrees that it will forbear from collecting three mortgage payments, but at the end of three months, he must resume his regular payments and make up the $3,000 in missed payments.
Moving From a Forbearance Agreement to a Repayment Plan
Any forbearance agreement will state that the payment deficiency must be repaid after the forbearance period. The lender will likely want the shortfall paid back in one lump sum immediately upon end of the forbearance, but you can also try to negotiate a repayment plan.
Mortgage Repayment Plans
A repayment plan is an agreement for homeowners who are already behind on their mortgage payments (for instance, if they've just come out of a forbearance agreement). With a repayment plan, the homeowner agrees with her lender that she'll resume her regular monthly mortgage payments, plus pay extra every month until the deficiency is gone.
Using John Q. Public's example, at the end of the three-month period, John goes back to work and is able to afford his regular $1,000 per month mortgage payment. However, he is now behind $3,000. He doesn't have $3,000 available to pay, but the bank agrees that he can make it up by paying an extra $500 per month for six months until the arrears are cured.
If a repayment plan is untenable because the payment arrears are too high, or if the bank won't agree to a repayment plan, the next stop is an attempt at a loan modification.
Mortgage Loan Modifications
A loan modification is a long-term solution to a defaulted mortgage. If you've fallen behind and don't have enough money to make up the arrears, a loan modification might be the answer. Often, the lender will agree to modify your interest rate and maturity date and also to roll the arrears into the principal balance of the loan.
A loan modification, unlike a forbearance or a repayment plan, is permanent. You're essentially creating a new contract with the lender that will bind you until the loan is paid in full.
The Loan Modification Process
Loan modifications involve a formal process that varies from bank to bank; overall however, a lender will not agree to give you a loan modification until you're a certain number of months past due on your payments. You'll have to submit a loan modification package that includes tax returns, bank statements, pay stubs and other financial information. The bank will then decide if it wants to give you the modification.
Example of a Loan Modification
An example of a loan modification is if John Q. Public owed $200,000 on his mortgage when he stopped working for three months. He obtained a forbearance and then a repayment plan, but as soon as he goes back to work, he is fired.
It takes him six months to find a new job, and he doesn't make any of his payments during that time, including his repayment plan payments. By the time he starts working again, he owes $6,000 in mortgage payments, plus the $3,000 he owes from the forbearance period along with late fees.
He contacts his lender and submits a loan modification package. The lender agrees, based upon his financial hardship and his new ability to pay, to roll his past due payments into his total balance. His payments increase to $1,200 per month, and his total balance due is $209,000.
Stop Foreclosure With Chapter 13 Bankruptcy
If your lender won't give you a forbearance or a repayment plan, or if you apply for a loan modification and are denied, a Chapter 13 bankruptcy might also be an option, depending upon your circumstances. Chapter 13 is a type of bankruptcy filing for individuals who have the ability to make monthly payments and who have debts that are below certain limits.
In a way, a Chapter 13 bankruptcy case can force your mortgage lender to both give you a forbearance and give you a repayment plan. The filing of any bankruptcy case forces all creditors to stop collection activity, including foreclosure. If you file a Chapter 13 or any other bankruptcy before the sheriff sale occurs – even if it's only hours before – it will stop the sheriff sale.
Catching up on a Mortgage in Chapter 13
Once you file your Chapter 13 case, you can propose a plan to repay your creditors, including your mortgage lender, as well as the property tax bureau and any other creditors you have. Federal bankruptcy law allows you to propose to pay back the arrears over time through a Chapter 13 trustee while maintaining your ongoing regular monthly payments.
Chapter 13 Bankruptcy Example
Suppose John Q. Public's lender denied his loan modification application and began foreclosure proceedings. John then talked to a bankruptcy attorney, who determined that he qualified for Chapter 13. John files a Chapter 13 bankruptcy, and the court approves his plan, which is to pay the mortgage lender $9,000 through the Chapter 13 trustee over five years. Outside of the plan, he resumes his $1,000 per month regular payments directly to the bank.
Consult with a Lawyer
Some attorneys also provide assistance with loan modifications and other negotiations with lenders for a set fee. Most bankruptcy attorneys provide free consultations, and often, their fees are paid through your trustee payments when you file a Chapter 13. Filing a Chapter 13 without an attorney can cause a lot of problems, so if you are considering it, speak with a lawyer first.
- Nolo: What's the Difference Between a Loan Modification, Forbearance Agreement, and Repayment Plan?
- Justia: Forbearance Agreements and Repayment Plans
- Freddie Mac: Understanding Forbearance
- UpCounsel: Loan Forbearance Agreement Form: Everything You Need to Know
- Lawyers.com: Forbearance Agreements, Repayment Plans, and Loan Modifications: Helping You Avoid Foreclosure
- Lending Tree: What Is Mortgage Forbearance?
- HomeOwnership.org: Loan Forbearance
- LSNJ Law: The Foreclosure Process
- Resnick Law P.C.: Foreclosure Timeline in Michigan
- U.S. Courts: Chapter 13 - Bankruptcy Basics
- Michigan Legal Help: Foreclosure and Eviction for Homeowners
Rebecca K. McDowell is an attorney focusing on creditor and debtor law. She has a B.A. in English and a J.D.