Any adjustment to a loan’s original terms and conditions is known as a “workout”. Here are the seven most-common types of mortgage-loan workouts, in order from most to least common:
- Repayment plan. The borrower is allowed to make up past-due payments over time by adding them on the future loan payments.
- Forbearance. The lender forgives past-due payments to bring the borrower current, thus extending the loan’s payoff schedule by the number of months in which payments were missed.
- Loan modification. The lender reduces a borrower’s monthly payment by adjusting the terms of the loan, such as by lowering the interest rate. Modifications usually are temporary and don’t involve reducing the loan’s principal, although there are some exceptions. A typical modification involves reducing the interest rate to 5 percent for five years.
- Short Sale. The lender agrees to let the borrower sell the home for less than the remaining loan balance.
- Short Refinance. A special loan modification in which the lender agrees to refinance the loan at a lower rate and reduce the principal. The federal housing bill approved in July proposes short refinancing to a fixed-rate FHA loan at no more than 90 percent of the original loan’s value.
- Loan assumption. A new borrower assumes the original borrower’s mortgage debt in exchange for the property.
- Deed in lieu of foreclosure. The borrower surrenders the mortgaged home to the lender in exchange for forgiveness of all mortgage debt.