Mortgage Forbearance – Is It The Right Choice?

I’m sure you’ve heard the famous saying “money doesn’t grow on trees”. Some homeowners unfortunately in this past year wish it did, when they couldn’t make their mortgage payments due to COVID-19. Then, they were relieved when they found out that their mortgage lender or service provider allowed them to temporarily pause or possibly even reduce their payments for a limited period. Of course that does relieve the financial pressure, but it’s a temporary solution to the problem.

Approximately 2/3 of those who entered forbearance during the pandemic have left the program. However, that does leave a little over two million homeowners who are remaining in the forbearance program.

If you are unable to make your payments on your mortgage, it’s very very important to contact your lender and request a forbearance. If you do not contact your lender – the impact on your credit history can be devastating especially if you stop making payments altogether. In those cases, the lender will contact the credit reporting companies and report you as delinquent, which can have a lasting negative impact on your credit score. When you request a forbearance, you’ll have a forbearance agreement. That agreement is your “protection plan” which protects you from having those negative impacts.

Sometimes, there is a little confusion in regards to a forbearance, so I’d like to take a moment and clear that up. Forbearance does not forgive the money that is owed.  I repeat – forbearance does not forgive the money that is owed. You, the borrower, must repay any missed or reduced payments in the future.  If forbearance was issued under the CARES Act, the lender cannot require payment in full at the end of the forbearance.  Additionally, Fannie Mae has declared “following forbearance, you are not required to repay missed payments all at once, but you have that option.”

The forbearance agreement which is issued by the lender allows you, the borrower, to avoid foreclosure for a set period (hopefully and ideally until the borrower’s financial situation improves). If, at the end of that stated period, the borrower’s hardship still exists, the lender may be able to extend that time frame. In regards to provisions with the forbearance, they vary based on the type of mortgage. Your lender can inform you on the specific provisions and options which may be available to you.

Loans made by Fannie Mae and Freddie Mac require lenders to suspend reports to credit bureaus of past due payments for borrowers in a forbearance plan and no penalties or late fees will be assessed.  Furthermore, the lender is mandated to “work with the borrower on a permanent plan to help maintain or reduce monthly payment amounts as necessary, including a loan modification.”

Once you have reached the end of a forbearance, several options are available to repay the suspended or paused amounts which are due. You can resume your normal payment and a repayment plan can be established. If you begin making payments but can’t afford the additional payments, the missed payments can possibly be added to the end of the loan or a secondar lien can be in place which is due and payable when you refinance, sell or terminate your mortgage.

In a case of the borrower not being able to make the regular payments, a loan modification might be the answer. Those can be available with lower payments, but a term is extended. While the CARES Act does not require borrowers at the end of the forbearance period to repay skipped payments in a lump sum, if a borrower is able, they may do so. 

What’s the purpose? Glad you asked. The purpose is to re-establish a payment plan so that the borrower can repay the money owed. To be eligible for a loan modification, borrowers must show that they are unable to make their current mortgage payments due to financial hardship, but they also must demonstrate they can meet their obligations with those proposed restructured terms.

Under the CARES Act, borrowers with a GSE-backed mortgage are entitled to an additional 180-day extension which would be a total of 360 days.  It is necessary to contact the servicer/lender for the extension.

Professional advice is always recommended in regards to forbearance, as there can be both legal and tax issues.  A list of U.S. Department of Housing and Urban Development approved Counseling agencies are available.

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