HAMP Loan Modification: Principal Forbearance vs Principal Forgiveness
by Raul in Burbank, California
Ask Kate if HAMP loan modifications include principal forbearance or principal forgiveness: Raul and his wife negotiated a HAMP modification with a large principal forbearance. Raul understood that the principal would be forgiven by the amount of the forbearance if he made his payments on time for three years. That is until his wife reminded him of a $313,000 balloon payment. He asks what happened to the principal forgiveness.
Ask Kate: HAMP Loan Modification and Balloon Payments By Raul in Burbank, California
I modified my home in Lake Arrowhead, CA three years ago with the assistance of a third party debt counselor (if that's what you want to call him).
The balance on the note was $641,000. With the mod, I was able to make the monthly mortgage payments. I was also pleased that $106K of the $641K was treated as a non-interest bearing principal forbearance.
In a nutshell, my debt counselor said that I would be eligible for forgiveness in that amount in three years if I didn't default on the new loan; and I paid it without any default. So with the forgiveness and payments I have made the past three years plus putting in a hundred here and there towards the principal balance, my current overall balance is about $519K. I thought I was heading in the right direction.
I thought wrong.
My wife then reminds me of the balloon payment clause in our modification agreement. The balloon payment of $313,000 is due in 2037!
I had my debt counselor from three years ago call the bank. He asked for a payoff quote from the bank. We received a payoff for $523K and there was no mention of, or inclusion of a balloon payment.
The bank representative spoke by phone to my debt counselor when asked about a balloon payment. The rep said that there was nothing mentioned in my file about it. He called another time and spoke to another rep. Same thing.
Perhaps, I should call the bank and find out for myself. Before I do so Kate, can this be possible? I'd love for this balloon payment to go away, but could the bank may have been mistaken? Was there some sort of legislation or class action law suit to make this go away for someone like me who's trying to do the right thing?
Kate's Answer: HAMP Loan Modification and Balloon Payments
For the sake of everyone reading this, let's define a balloon payment, principal forbearance, and principal forgiveness as they relate to modifying a mortgage.
Balloon Payments: Lump Sum Due
A home loan modification program that includes a balloon requires a lump sum payment to be made by the borrower after a predetermined period of time, for example, ten years. The balloon payment is usually triggered by the lender's act of granting a principal forbearance.
Principal Forbearance: Lower Monthly HAMP Payments
During the modification approval process, the goal is to reduce the house payment to an affordable level. To accomplish this, the lender may set apart a portion of the amount owed before calculating the payment. This is called a principal forbearance.
Although there is no interest charged on the principal forbearance, it must eventually be paid off. So upon refinance, sale of the home, or loan maturity, a balloon payment is required.
Principal Forgiveness: You're Off the Hook
However, under certain circumstances, a lender might grant a principal forgiveness in lieu of a principal forbearance. In this case, there would be no balloon payment because the amount forgiven would not require repayment.
Principal Forgiveness for Timely Payments
Principal forgiveness can also come in the form of a reward for making timely HAMP modification payments. However, this usually amounts to $10,000 over six years. Not to kick a gift horse in the mouth, this is a far smaller amount than the $313,000 in question.
YOUR Loan Modification Fine Print
Because HAMP agreements can differ, I'm afraid you'll need to get a magnifying glass and go line-by-line through your paperwork looking for terms such as principal forbearance, principal reduction, principal forgiveness, and balloon payment.
Although I'm not sure that the debt counselor is reliable, it might not hurt to hold his feet to the fire by asking him to point you to the verbiage in your modification documents that lay out the terms of the forgiveness that he described verbally.
Also in answer to your last question, I'm not aware of any legislation or class action law suit that would automatically convert principal forbearance into principal forgiveness. So again, I would urge you to peruse your final HAMP documents to determine if you received a principal forbearance or a principal forgiveness.
My very best wishes for your future,
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