A deferred balance is one possible method for a borrower to modify a loan. This normally would be done if the borrower is struggling with repayments, but there is a strong prospect that the borrower's financial situation will improve in the long term. Lenders typically will not insist that a borrower already be behind on payments before agreeing to such a modification.
Main Balance
With the deferred balance technique, the lender agrees to split the existing mortgage balance into two parts. The main part remains as the active loan, with scheduled monthly repayments and interest continuing to accumulate. Depending on the specific agreement, the borrower will continue to pay on this reduced principal portion over the rest of the originally scheduled loan period, or the lender may effectively reset the clock and set a new loan period.
Deferred Balance
The other part of the balance effectively becomes an interest-free loan to be paid off as a lump sum at the end of the mortgage term. The effect is that the person's monthly repayments will be lower because the amount of the principal subject to monthly payments has been reduced. Whether he winds up paying more or less overall depends on whether the loan repayment period is extended for so long that even with a reduced balance subject to interest, the total interest charged increases.
A borrower who gets a deferred balance should make plans to have the cash on hand to pay off this balance when the loan period ends.
Government Incentive
The government offers incentives for lenders to offer a deferred balance arrangement to borrowers. This incentive scheme is known as the Federal Housing Authority Home Affordable Modification Plan. The plan requires lenders to split the balance in a way that means the revised monthly payments are 31 percent or less of the borrower's gross income, although the new payments must be at least 70 percent of their original level. The government pays up to $1,250 to lenders who agree to such modifications.
Forgiveness
It is possible for a mortgage lender to forgive part of a loan. This means the outstanding principal is reduced, and the borrower no longer owes the money at all. This normally would happen only if a lender thought there was no hope of collecting the full amount at any time and felt it better to accept the loss than to proceed with foreclosure proceedings. The amount of the reduction will be detailed on IRS form 1099-C and classed as taxable income for the year for the borrower.
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