Pause Your Mortgage Payments
In 2021, some homeowners who can’t afford to make their mortgage payments could apply to have their mortgage servicer or lender to pause or reduce their payments for a limited period. We call this Mortgage Forbearance. While it does relieve the immediate financial pressure, it is a temporary remedy.
About 2/3 of the people who entered forbearance during the pandemic have exited the program. There are only a little over two million homeowners remaining in forbearance.
Act Quickly
It is important for owners who can’t make the payments on their mortgage to request a forbearance as soon as possible. Don’t stop making mortgage payments without a forbearance agreement. If you do, the servicer will report this information to the credit reporting companies. This can have a lasting negative impact on your credit history. Without going through that process, the lender assumes you are delinquent, and protections afforded under forbearance may not apply.
Temporary “Time Out”
Forbearance does not forgive the money that is owed. 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. According to Fannie Mae, you are not required to repay missed payments all at once following forbearance. But you have that option if you wish.
The forbearance agreement issued by the lender allows a borrower to avoid foreclosure for a period of time. Hopefully, the borrower’s financial situation improves. If the borrower’s hardship still exists at the end of the period, the lender may be able to extend the time frame.
Forbearance Vary based on Mortgage Type
The provisions of the forbearance vary based on the type of mortgage. The lender can tell you the specific provisions and options.
Fannie Mae and Freddie Mac require lenders to suspend “past due” reports to credit bureaus for borrowers in a forbearance plan. This means no penalties or late fees will be assessed. Furthermore, they mandate that the lender work with the borrower. They can create a permanent plan to help maintain or reduce monthly payment amounts or initiate a loan modification.”
At the end of the forbearance, there can be several options available to repay the suspended or paused amounts. One option is to resume your normal payment and establish a repayment plan for the missed payments. Perhaps you can start making payment but can’t afford additional payments. The missed payments may be added to the end of the loan. Other alternatives are a secondary lien that is due and payable when you refinance, sell or terminate your mortgage.
Loan Modifications
In cases where the borrower can’t afford to make the regular payments, an alternative is a loan modification. This could be with lower payments, but the term would be 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.
The purpose of this is to re-establish a payment plan that the borrower can repay the money owed. To be eligible for a loan modification, borrowers must show they cannot make the current mortgage payments because of financial hardship while demonstrating they can meet their obligations with the proposed restructured terms.
Under the CARES Act, borrowers with a GSE-backed mortgage get an additional 180-day extension. This would make it a total of 360 days. It is necessary to contact the servicer/lender for the extension.
There can be both legal and tax issues concerning forbearance. So we recommend that you seek professional advice. A list of U.S. Department of Housing and Urban Development approved Counseling Agencies are available.