Loan modification options
When credit unions can perform loan modifications for members, the options include:
• Temporary forbearance. This is often the first option granted to borrowers. During a limited time period, usually three to six months, the lender reduces the borrower’s payments to a realistic affordable amount, based on income and existing obligations. These payments might include principal and a reduced interest rate or interest only.
• Stretched loan. This means extending the term of the loan and the maturity date. For example, suppose a member has paid two years on a car loan and has three years’ balance left to pay. The credit union can extend the term of the loan back to five years and stretch the balance remaining out over five years to reduce the payment. In the case of a house, if the member has a 10-year mortgage with a high balance remaining, the credit union might extend the term to 30 years—again to reduce the monthly payment.
• Reduced interest rate. Credit unions usually offer this option for no more than one to five years before mandatory review is required. This ensures the credit union won’t get locked into a low interest rate for an extended period of time in relation to market interest rates.
• Mortgage conversion. This usually involves converting from an adjustable-rate mortgage to a fixed-rate mortgage.
• Combined debt. The credit union combines the member’s secured and unsecured debt into one new loan with an affordable monthly payment, based on income and obligations. If a member has both a mortgage and an outstanding balance on a credit union credit card, for example, the credit union might take the card balance and add it to the house loan. In this way, the member pays a lower interest rate on secured debt.
• Waived late fees.
• Reduced or capitalized past due amounts, accrued interest, taxes, insurance, or fees.
Other, less commonly pursued options include:
• Stepped payment plan. For example, the credit union might greatly reduce the rate and/or the monthly payment during the first year of the mortgage, increase it the second year, and then return it to the original rate/payment amount in the third year.
• Principal forbearance. NCUA defines this as “a loan modification where the lender reduces the unpaid principal balance of a loan for amortization purposes. The borrower’s monthly loan payment is lower, based on amortizing the reduced amount of principal. But the borrower still owes the ‘postponed’ principal when the loan is paid in full or the property is sold or refinanced.”
• Reduction or forgiveness of principal. The lender agrees to wipe a portion of the unpaid principal off the books. For instance, say the borrower took out a $300,000 mortgage, and paid $50,000 on the balance, including interest. The borrower wants the principal reduced to $150,000, the current fair market value of the house. If the credit union does this, it will take a hit both on the principle and the interest. In some instances, however, this might be preferable to foreclosing and possibly getting significantly less than the $250,000 owed.
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