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

HAMP Loan Modification and Balloon Payments
Hi Kate,

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?


Ask Kate at Get-Your-Best-Mortgage-Rate.com
Kate's Answer: HAMP Loan Modification and Balloon Payments

Hi Raul,

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.

Read more about principal forbearance at HAUP Mortgage Forbearance for Unemployed Homeowners.

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.

You can read more about principal forgiveness at Hardest Hit Funds for Principal Reductions.

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.

See more help for mortgage borrowers with lump sum balloon payments at Exit Strategy for Mortgage with Balloon Payment by Charlie from NH and Caught In A Balloon Payment Mortgage by Tina from Coatesville, PA.

My very best wishes for your future,

Ask Kate

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Foreclosure alternatives
by: Andy from Hebron, KY

Hello Kate,

My name is Andy and I live in my home with my 4 kids. I am currently in foreclosure and I am looking for any way to save my home. The issue is that I have a balloon mortgage that came due in March of 2015. I was in the middle of a divorce and the bank would not let me refinance without her. I got divorced in July Of 2015, but, at That time, I was 4 months late on payments.

I tried to do a loan modification, but the lender required my ex-wife to stay on the note and she refused. I can't get a loan to refinance because of late payments and the bank won't let me do the loan modification without her.

Please are there any options for me to save my home?

Sincerely, Andy

Hi Andy, Kate here...

Check out if you qualify for Kentucky's Hardest Hit Fund program (HHF). Read more about HHF and how to contact your state resources at Hardest Hit Funds Principal Reduction Program.

I also suggest you call a HUD-approved housing specialist to discuss being turned down for a HAMP modification because the bank required your ex-spouse's signature. The contact information for the free HUD-approved housing specialists is found at Deed in Lieu of Foreclosure - Mortgage Crisis Not Over.

Best wishes, Kate

Mortgage debt forgiveness act for 2015
by: Yullecce S. from Baltimore, Maryland

Where can I find information on the mortgage debt forgiveness act for 2015. Was it passed?

Hi Yullecce, Kate here...

Good news! Yes, Congress did in fact extend the Mortgage Debt Relief Act of 2007.

Get my update at Mortgage Forgiveness Debt Relief Act: Update for Homeowners Regarding Foreclosure and Real Estate Short Sale.

Best wishes, Kate

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