The terms of some mortgage loan modifications include deferment of a portion of the money owed, which is not paid back in monthly payments like the rest of the loan. Rather, the deferred amount is put to the side when a loan is permanently modified, where it accumulates no interest.
When the loan matures or the home is sold, the deferred amount has to be paid back in one balloon payment.
When a loan modification includes a deferment it is typically for the amount the borrower is past due, which includes fees, and can be tens or hundreds of thousands of dollars.
How a deferment benefits you
Homeowners who need a loan modification have often experienced a serious hardship such as a job loss, divorce, or illness which caused them to fall behind on their mortgage. The only way to reinstate their loan and return it to normal servicing is with a loan modification.
Loan mods can lower payment
Unfortunately many borrowers who've defaulted don't make as much money as they did when they purchased their home. Maybe they got laid off and fell behind on their mortgage, then got another job that pays less. Now they need to have their loan reinstated, but with a lower payment to be able to afford to keep their home. Deferring some of the loan can help to do that.
The bank will usually try to bring the payment down to an affordable portion of the borrower's income by first lowering the interest rate and extending the term of the loan to 30 or 40 years. If that doesn't do enough, then they may offer a deferment.
Sometimes the terms of the loan modification will state that a portion of the deferment will be forgiven after the borrower makes payments on time for 3-5 years. (Paying on time includes any time within the 15 day grace period.)
Paying off the deferment
Getting a loan modification with a deferment can be an important part of avoiding foreclosure and keeping your home with a payment you can afford.
Plenty of time to save
You may find it intimidating to have a balloon payment of $50,000 or so due in one chunk. But you'll likely have 3 or 4 decades to save before you have to pay it. And if you don't have the cash to pay the balloon when it's due, you could refinance it into a new mortgage.
Getting a loan modification
You can't know what terms your loan modification will have, including if you will have a deferment, until your bank makes you an offer. There's no guarantee you'll be offered a loan modification at all, much less that it will have certain terms like a deferment.
Applying for a loan mod is not easy
To get a loan modification you will have to submit an application, called an RMA (Request for Mortgage Assistance), to your loan servicer that includes detailed documentation of your income and finances. Usually the borrower is required to make three trial payments to demonstrate that they can afford the proposed payment. If the trial payments are made in full and on time a permanent loan modification should be offered.
Borrowers often apply for a loan modification and are denied because the lender isn't convinced that they have the income to afford the property. You could also be denied for making too much money. It's often a fight to get your lender to give you a trial loan modification.
It helps to get help from a qualified professional, such as a foreclosure defense attorney, who can keep you out of foreclosure for as long as possible and give you the best odds of getting a loan modification with good terms.
Images courtesy of Sira Anamwong and Stuart Miles at FreeDigitalPhotos.net