Mortgage Forbearance

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Real Estate

Some homeowners who could not afford to make their mortgage payments this past year have been relieved to find out that their mortgage lender* allowed them to pause, or possibly reduce, their payments for a specified amount of time. While this can certainly relieve some financial pressure, it is only 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.

It is not only important, but crucial, for owners who find that they cannot make the payments on their mortgage to contact their lender and request a forbearance. If you stop making mortgage payments without a forbearance agreement, you will go into default and the lender will report this information to 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.

Forbearance does not forgive the money that is owed, it merely provides relief from making payments. 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. Also, 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 issued by the lender allows a borrower to avoid foreclosure for a period until, hopefully, the borrower's financial situation improves. If, at the end of the stated period, the borrower's hardship still exists, the lender may be able to extend the time frame.

The provisions of the forbearance vary based on the type of mortgage. Your lender can tell you the specific provisions and options.

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."

At the end of the forbearance, there can be several options available to repay the suspended or paused amounts. You can resume your normal payment, and a repayment plan can be established. If you can start making the payment but can't afford additional payments, the missed payments can be added to the end of the loan, or a secondary lien that is due and payable when you refinance, sell or terminate your mortgage.

In cases where the borrower can't afford to make regular payments, a loan modification may be available with lower payments, but the term will 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, a borrower has the option do so.

The purpose of this 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 they cannot make the current mortgage payments because of financial hardship while also demonstrating they can meet their obligations with the 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 lender for this extension.

There can be both legal and tax issues regarding a forbearance, and professional advice is recommended. A list of U.S. Department of Housing and Urban Development approved Counseling agencies is available.

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* Lender here represents any entity which services your mortgage