For troubled mortgage borrowers, it may not be so obvious as to when it is appropriate to negotiate for a forbearance agreement instead of a mortgage loan modification. As financial tools that can save borrowers from foreclosure, they do the same for the bank. The bank, weighing its options and intent on maximizing profitability, will assess the lenders current and future solvency.
If a borrower is stricken with debt and has employment issues, the bank may agree to a loan modification. If the borrower has hit a rough patch, but has maintained good standing with creditors forbearance is most likely to be favorable to both bank and creditor.
Forbearance like a temporary loan modification
It should be acknowledged that forbearance was more common in a normal housing market, where most individuals could reasonably expect to find and keep gainful employment.
A forbearance agreement doesn’t hurt your credit, so long as you pay as agreed and return to normalcy in the time the agreement stipulates. Banks find it preferable to a loan modification because they stand to lose nothing. The forbearance agreement simply says that, over the agreed time period, a bank will defer interest and fees to the principal of the loan. It is also likely that they accept lesser monthly payments from the borrower. You might consider a forbearance agreement something like a temporary loan modification.
In this unusual market, characterized by foreclosure, short sales, and pervasive unemployment, loan modification has become the norm. Forbearance has become less common because fewer people can expect to recover lost earning potential quickly. Forbearance is a practice reserved by banks for homeowners who anticipate a reduced income only in the short-term. Your bank will be able to tell you if you qualify for forbearance or if a loan modification is a better option.