Mortgage Forbearance - Do You Want To Get Back On Track?

Mortgage forbearance offers relief to homeowners who are facing financial issues and limitations. The borrowers can press pause or reduce their mortgage payments for a certain period of time, without incurring late fees or penalties. However, the interest will continue building up throughout the forbearance period, which you need to pay off after the end of the forbearance period along with the missed payments.

You can become eligible for mortgage forbearance due to a job loss, decrease in income, medical condition, or other circumstances that are beyond your control. For instance, many homeowners have been impacted by the COVID-19 pandemic, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act provides relief to people who were unable to manage their mortgage payments. Further, to qualify for forbearance, you must have been regular with your mortgage payments.

Although mortgage forbearance does not negatively impact your credit score, it is important to remember that missed payments might still be reported to credit bureaus, which could eventually affect your credit score.

If you are planning to opt for mortgage forbearance, it is crucial to understand how it works and how you will cover the missed out payments. Let’s begin!

End of Forbearance

The forbearance period commonly lasts up to 12 months. However, it can vary depending on your circumstances and the terms of your loan agreement. Once the forbearance period has ended, you will still have to make up for the missed payments, which include the mortgage and accrued interest payments. Therefore, it's important to plan for your repayment options.

Owner of the Loan

To understand the mortgage forbearance repayment options, you need to know who owns your loan. The loan servicer, who handles administrative tasks, like receiving payments and managing escrow accounts, may be different from the entity that owns your loan.

You might, for instance, have a loan that is owned by Freddie Mac but is serviced by Bank of America. In this case, Freddie Mac is the loan owner and the entity that makes the final decisions regarding forbearance options. To determine who owns the loan and the available options, you can simply ask your service provider.

Repaying Government-Backed Loans

Borrowers who are having trouble making payments have options thanks to government-backed loans of Fannie Mae, Freddie Mac, HUD, VA, and USDA. You can delay mortgage payments for up to a year if you choose full forbearance. However, you will have to pay back a year's worth of mortgage and interest. The repayment plans available include:

• Lump-sum Payment
  
  This option requires you to pay the entire amount owed in a single payment. This may not be feasible if you have recently experienced unemployment or financial strain.


• Short-term Repayment Plan
  
  It enables you to pay back the amount of forbearance over a period of six months by dividing the total amount owed by six and adding it to your monthly mortgage payments.


• Extended Loan Modification
  
  This option extends the mortgage term by adding the deferred amount to your loan, thereby increasing your loan duration.


• Flex Modification
  
  It is a good option for you if you cannot afford your current mortgage interest rate and/or term, as this plan involves loan modification to make it affordable. However, it is suggested that you consult a professional before choosing this course of action.


• Cap and Extend
  
  You can opt for this if you cannot afford insurance or taxes paid through escrow accounts. During forbearance, the lender makes these payments, which are applied to your principal balance after the forbearance period ends. The term is also extended, and the new principal is the sum of the old balance and the lender's escrow payments.

• VA Loans
  
  The VA loan is offered by the Department of Veterans Affairs. The loan provides helpful options, including loan modification and payment plans, for borrowers to get back on track with their loans after a forbearance period. Additionally, if you have a VA loan and the forbearance period has ended, the lender cannot demand a single, lump sum payment. The VA loan also offers loss mitigation options to assist borrowers in staying in their homes.


• Fannie Mae & Freddie Mac Loans
  
  Both Fannie Mae and Freddie Mac loans are backed by the Federal Housing Finance Agency (FHFA). If you are a borrower of such loans, you have four repayment choices after forbearance.
  
  
  • Reinstatement - You pay the missed payments in full at the end of the forbearance period.
  • Repayment plan - You pay back a fraction of your past-due payments every month.
  • Payment deferral - Your missed payments are not due immediately after the forbearance period. Instead, the missed payments are postponed until the end of the loan term and will be due as a non-interest-bearing balance.
  • Loan modification - There will be a permanent change to reduce your monthly payments with chances of a term extension.


• Federal Housing Administration (FHA) Loans
  
  FHA loans are insured by the U.S. Department of Housing and Urban Development (HUD). A huge benefit of an FHA loan is that there is no requirement for a lump sum payment at the end of the forbearance period. Instead, you can select from various options offered by the FHA Home Affordable Modification Program (HAMP).
  
  
  • Standalone Loan Modification
    
    In this modification, the principal amount would be increased by the amount of missed payments and the loan term would be increased to 30 years. However, your monthly payments would be reduced.
  
  
  • Standalone Partial Claim
    
    It allows you to avoid changing the principal balance of your loan. Instead, any missed payments are placed into a no-interest lien, which means you don’t have to pay them immediately. Additionally, a no-interest lien against your home means that the unpaid amount is secured against the property, but it does not accrue any additional interest over time. This lien can be resolved in the future when you would either refinance or sell your home.
  
  
  • Combination Loan Modification & Partial Claim
    
    You can combine a loan modification and a partial claim. The missed payments would be added to your principal balance and your loan would be extended for 30 years. A portion of the missed payments would be put into a no-interest lien against your home, which you can put an end to by refinancing or selling the home. The combination of these two options can make up for any missed payments and ultimately reduce your monthly mortgage payment.
  
  
  • U.S. Department of Agriculture (USDA) Loans
    
    USDA attempts to make homeownership easier in rural areas. If you are looking to purchase or construct a property in rural areas, USDA loans can be of great help. These loans often offer no-down-payment options, making them accessible to many buyers.
    
    Additionally, if you experience financial hardship and decide to enter forbearance, the lender must offer options for repayment. Once you have the pocket to resume your payments, you can choose an affordable repayment plan or mortgage term extension. The latter option allows for missed payments to be deferred until the end of the loan, providing flexibility for homeowners to catch up on missed payments.
  
  
  • Non-Federally Backed Mortgage Loans
    
    The repayment options for conventional loans can vary based on the lender and the terms of the loan. However, many of these loans are funded by Fannie Mae or Freddie Mac, and hence follow the repayment options mentioned above.