Mortgage Forbearance – All You Need To Know
Mortgage forbearance is a temporary reduction or suspension of mortgage payments offered by a lender to a borrower facing financial hardship. This allows the borrower to reduce or stop making payments for a set period of time while they get back on their feet. During this time, the lender may agree to not initiate foreclosure proceedings. At the end of the forbearance period, the borrower will typically be required to repay the missed payments either all at once or in a payment plan.
Why Borrowers Need Mortgage Forbearance
Borrowers may need mortgage forbearance for various reasons such as:
Unemployment: Loss of job or reduction in income can make it difficult for borrowers to keep up with mortgage payments.
Natural disasters: Disasters such as hurricanes, earthquakes or fires can cause significant damage to a borrower’s property and finances.
Medical expenses: Unexpected medical bills can strain a borrower’s finances and make it difficult to pay the mortgage.
Military deployment: Deployment of a borrower or co borrower in the military can result in a reduction of household income.
Other financial difficulties: Borrowers may face other financial difficulties such as divorce, death of a co borrower or high levels of debt.
Forbearance can provide relief to borrowers facing these types of financial hardships by allowing them to reduce or suspend mortgage payments for a set period of time. This can help the borrower catch up on their finances and get back on track with their mortgage payments.
Mortgage Forbearance Options
There are several options for mortgage forbearance including:
Partial claim: This option is available through the Federal Housing Administration (FHA) and involves a one time advance from the government to bring the borrower current on their mortgage.
Repayment plan: Under this option, the borrower agrees to repay the missed payments over an extended period of time typically in addition to their regular mortgage payments.
Loan modification: This option involves changing the terms of the loan to make the payments more affordable for the borrower. The lender may lower the interest rate, extend the loan term or change the type of loan.
Deferral of missed payments: Under this option, the lender agrees to defer the missed payments until the end of the loan term. The borrower will then be responsible for repaying the missed payments either all at once or through a repayment plan.
The specific forbearance options available to a borrower will depend on the lender and the type of loan. Borrowers should work with their lender to determine the best forbearance option for their individual situation.
Types Of Mortgage Forbearance
Two common types of temporary forbearance plans include:
Retained Payments Forbearance
Retained payments forbearance is a type of mortgage forbearance that involves the lender agreeing to temporarily reduce the amount of the borrower’s monthly mortgage payment. Instead of making the full payment, the borrower makes a reduced payment for a set period of time. The difference between the reduced payment and the full payment is then “retained” by the lender and added to the end of the loan. This option can provide short term relief for borrowers facing financial hardship and can make it easier for them to catch up on their mortgage payments. However, it will also result in the borrower having a larger mortgage balance at the end of the loan term which will increase the overall amount of interest paid over the life of the loan.
Reduced Mortgage Payments
Reduced mortgage payments forbearance is similar to retained payments forbearance in that it involves the lender temporarily reducing the amount of the borrower’s monthly mortgage payment. The difference is that the under reduced mortgage payments forbearance the borrower makes a reduced payment for a set period of time but does not have to repay missed amount at the end of term. Instead, the missed payments are simply “forgiven” by the lender. This can provide much needed relief for borrowers facing financial hardship and can make it easier for them to catch up on their mortgage payments.
Repayment Options In Mortgage Forbearance
Popular repayment options include:
One Time Payments
One time payment mortgage forbearance is a type of forbearance where the borrower makes a one time payment to the lender in exchange for a temporary reduction or suspension of mortgage payments. This option may be available to borrowers who are facing a temporary financial hardship and need some time to catch up on their mortgage payments. The one time payment may be used to cover the missed payments or to bring the loan current. After the forbearance period the borrower resumes making their regular mortgage payments. The exact terms of a one time payment forbearance will vary depending on the lender and the borrower’s individual situation and it may not be available for all borrowers.
Extended Terms
Extended terms repayment mortgage forbearance is a type of forbearance where the lender agrees to temporarily reduce or suspend mortgage payments for a set period of time and then the borrower repays the missed payments over an extended period of time typically through a repayment plan. This option allows the borrower to catch up on their mortgage payments gradually rather than having to repay the missed payments all at once. The terms of the repayment plan will be negotiated between the borrower and the lender and will typically be added to the end of the loan term. Extended terms repayment mortgage forbearance can provide much needed relief for borrowers facing financial hardship and can make it easier for them to get back on track with their mortgage payments.
Payments Spread Over Time
Payments spread over time mortgage forbearance is similar to extended terms repayment mortgage forbearance in that it involves the lender temporarily reducing or suspending mortgage payments for a set period of time and then the borrower repaying the missed payments over an extended period of time typically through a repayment plan. The difference is that under this option the missed payments are spread out over a longer period of time typically added to the end of the loan term to make the payments more manageable for the borrower.
Forbearance Rules Under The CARES Act
Under the CARES (Coronavirus Aid, Relief and Economic Security) Act which was enacted in response to the COVID19 pandemic and certain rules regarding mortgage forbearance were put in place for federally backed mortgage loans. These rules include:
Eligibility: The CARES Act provides for up to 360 days of forbearance for homeowners with federally backed mortgage loans who have experienced financial hardship due to the pandemic.
Reporting: The CARES Act requires that servicers of federally backed mortgage loans report forbearance status to credit reporting agencies in a manner that will not negatively impact the credit score of borrowers in forbearance.
Application process: Borrowers do not need to provide documentation or verification of their financial hardship to be eligible for forbearance under the CARES Act.
Loan modification: The CARES Act provides that a borrower who enters into forbearance cannot be charged fees or penalties for loan modification if they later seek to modify the terms of their loan.
End of forbearance: At the end of the forbearance period, the CARES Act requires services to offer a repayment plan to borrowers who are unable to resume their regular mortgage payments.
The exact terms and conditions of forbearance under the CARES Act may vary depending on the lender and the type of loan and borrowers should work with their lender to determine their individual eligibility and the best forbearance option for their situation.
How To Qualify For Mortgage Forbearance
To qualify for mortgage forbearance borrowers must typically meet the following criteria:
Request forbearance: Borrowers must contact their lender and request forbearance.
Financial hardship: Borrowers must be experiencing a financial hardship due to an event such as job loss, reduction in income or medical expenses among others.
Federally backed mortgage loan: Forbearance under the CARES Act is only available for homeowners with federally backed mortgage loans which includes loans backed by Fannie Mae, Freddie Mac the Federal Housing Administration (FHA) the Veterans Administration (VA) and the Rural Housing Service (RHS).
It is important to note that the exact eligibility criteria for mortgage forbearance may vary depending on the lender and the type of loan and borrowers should work with their lender to determine their individual eligibility. In addition, borrowers who are considering forbearance should understand the potential consequences including the impact on their credit score and the requirement to repay missed payments at a later date.
Will Mortgage Forbearance Affect My Credit
Mortgage forbearance can affect a borrower’s credit score but the exact impact will depend on several factors including the credit reporting practices of the borrower’s lender and the length of the forbearance period. In general, a borrower who enters into mortgage forbearance and misses payments may see a negative impact on their credit score. However, if the lender reports the forbearance status in a manner that accurately reflects the borrower’s circumstances, it may not have a significant impact on their credit score.
It is important to note that the CARES Act requires servicers of federally backed mortgage loans to report forbearance status to credit reporting agencies in a manner that will not negatively impact the credit score of borrowers in forbearance. Borrowers should work with their lender to understand the potential impact on their credit score and to determine the best options for their individual situation. In addition, borrowers should take steps to maintain their credit during forbearance such as making payments on other debts if possible and keeping their debts paid and current.
What If I Do Not Qualify For Mortgage Forbearance
If you do not qualify for a mortgage forbearance, there are other options that you can consider to address your financial hardship:
Refinance: You may be able to refinance your loan to lower your monthly payments or to secure a lower interest rate.
Short sale: If you are unable to make your mortgage payments and your property is worth less than the amount owed on the mortgage, you may be able to negotiate a short sale with your lender in which the lender agrees to accept a smaller payoff than the full amount owed.
Loan modification: You may be eligible for a loan modification which would involve changing the terms of your loan to make your payments more affordable.
Selling your property: If you are unable to make your mortgage payments and are facing a hardship you may consider selling your property as a way to avoid a foreclosure.
Deed in lieu of foreclosure: In some cases, you may be able to transfer ownership of the property back to the lender in exchange for the cancellation of the mortgage debt.
It is important to carefully consider all of your options and to seek the advice of a financial professional or a housing counselor if you are facing financial hardship and are unable to make your mortgage payments.
Conclusion
Mortgage forbearance can provide relief for home owners who are facing a financial hardship and are unable to make their mortgage payments. However, it is important to understand the potential consequences of entering into a forbearance agreement including the impact on your credit score and the requirement to repay missed payments at a later date.