Mortgage Forbearance Agreements

Many Americans are experiencing financial hardship triggered by the Covid-19 pandemic. Due to a loss of income, homeowners are struggling to pay their mortgage payments. With missed payments, they risk losing their homes through foreclosure. But, initiation of a foreclosure action doesn’t mean that all is lost. People who can’t afford to make their mortgage payments can often save their homes. There are options available. 

One short-term option is a forbearance agreement, which gives a borrower a pause from having to make mortgage payments for a short time. The lender then agrees to give up its rights to foreclose on the property during this pause. This article discusses what a mortgage forbearance agreement is and how it may be able to help homeowners facing challenging financial circumstances.

What Is Mortgage Forbearance?

A mortgage forbearance agreement is an agreement wherein the lender agrees to suspend or reduce the mortgage payments that the borrower is required to make for a short period of time. Without a forbearance, the loan documents allow the lender to foreclose on a borrower’s house if the borrower misses monthly mortgage payments. During the forbearance period, the lender forbears or gives up its right to foreclose. 

A forbearance agreement is a payment deferral plan. The homeowner defers making mortgage payments until a later date. After the forbearance period ends, the borrower must make up the missed mortgage payments due under the loan document. This includes principal, interest, and taxes. The borrower will also have to make the regular payments that become due after the foreclosure period ends. 

If the missed payments are not made up after the forbearance period, the lender can exercise its right to foreclose. Forbearance periods range from 3 to 6 months. Some may be up to 12 months. This is only a short-term solution if a borrower is experiencing a sudden temporary financial hardship.

How Do I Make Up The Payments Missed Under A Forbearance Agreement?

As part of the forbearance plan, the borrower will be required to have a repayment plan. The repayment plan will outline how the missed mortgage payments will be repaid. There are various options available to the homeowner:

• Lump-sum repayments: This option can be challenging because the borrower will have to make one or several large payments to make up for all the missed payments after the forbearance period ends. This is usually only the best option available if homeowners opt to sell other property to make up their missed payments quickly. Fannie Mae and Freddie Mac-backed mortgages can’t require the missed payments to be repaid in one lump sum. Fannie Mae and Freddie Mac are federally backed home mortgage companies created by the U.S government. 

• Payment plans: The borrower can repay the missed payments over time by increasing the amount of the regular payment. For example, if the regular monthly mortgage payment is $1,300, the monthly payment may be increased to $1,600 until all the missed payments are repaid. The homeowner will have to keep up with these payments to avoid foreclosure. 

• Loan modifications: The borrower may seek to modify the terms of the loan document. Their interest rate may be reduced and the term of the home loan may be extended. Missed mortgage payments may be added to the end of the loan. Note that applying for a loan modification takes time. Also, homeowners who have entered into a forbearance may not be eligible for a refinance for some time. Exception: the Federal Housing Finance Agency (FHFA) has stated that Fannie Mae and Freddie Mac home loans may be able to refinance within three months of forbearance. 

• Payment deferral option: This is available for homeowners with Freddie Mac and Fannie Mae home loans. The homeowner may opt to repay the missed payments when the house is sold, refinanced, or when the loan matures at the end of the loan. This option avoids an increase in the mortgage payment to repay missed payments. 

Pros And Cons Of Mortgage Forbearance

Pros:

This is a favorable option for those experiencing a short-term financial setback. It provides mortgage relief without the threat of foreclosure. The lender forbears its right to foreclose for a short time.

A forbearance avoids missed payments being reported to credit bureaus. Lenders report missed mortgage payments to the three credit reporting agencies, TransUnion, Equifax, and Experian. These credit bureaus will disclose the missed payments on your credit report. This reporting negatively affects your credit score and remains on your credit history for up to seven years. 

Foreclosure is a long and expensive process. Lenders are willing to enter into forbearance agreements and provide borrowers with temporary mortgage relief to avoid foreclosures. 

Cons:

The disadvantage to forbearance is figuring out how to repay the missed payments. The options for repayment have financial consequences. Missed payments may be repaid by extending the term of the home loan. If you take this approach, your home loan will now need to be repaid over a longer duration. Missed payments may also need to be repaid in one large sum, which is difficult to do. Because payments were missed, the balance of the loan may be increased through unpaid interest.

Forbearance Agreements are only a band-aid. They offer temporary mortgage relief. Borrowers who experience financial hardships for longer than the term of the forbearance agreement will need to find a long-term permanent solution to their challenges, such as a loan modification.

COVID-19 Mortgage Forbearance

Coronavirus aid is available to homeowners suffering from a loss of income due to the coronavirus pandemic. The CARES Act requires that most mortgage servicers provide forbearance to mortgage borrowers who have suffered a coronavirus-related financial hardship. Covid hardship forbearance applies to federally-back and federally sponsored mortgages, including HUD/FHA, VA, USDA, Fannie Mae, and Freddie Mac loan agreements. 

Borrowers need to apply for forbearance from their lender or the mortgage servicer. They have a right to receive a pause or reduction on their loan payment from their mortgage servicer for up to 6 months. Borrowers may also request an extension of the forbearance period from their mortgage servicer for an additional 180 days. Late fees are not charged during this time. Affordable plans to make up the missed payments are available. 

Forbearance Vs. Waiver

A forbearance should not be confused with a waiver. With a forbearance, the mortgage servicer is agreeing to refrain from acting upon their rights in the event of default on mortgage payments for a short time. The lender is not giving up their right to foreclose altogether. A mortgage default happens when you miss making payments to your lender.  At the end of the forbearance period, a repayment plan is necessary to repay the missed payments, or the mortgage servicer can start a foreclosure action.

A waiver occurs when the loan servicer gives up their rights to foreclose if there is a default. This puts the lender and borrower in the same position as if the default has not happened. 

Alternatives To Mortgage Forbearance 

Mortgage forbearance offers mortgage relief and avoids foreclosure. But, this is only a temporary situation. You will need to have a plan in place as to how you are going to make up those missed payments and keep current with your regular payments moving forward. If your challenging financial situation is more than temporary, consider these alternative options: 

Loan Modification

If you’re behind on your mortgage payments, you may qualify for a loan modification. A loan modification changes the terms of the loan document by lowering your monthly payment amount. Missed mortgage payments will be added to the total amount that you owe. The loan’s interest rate may be reduced and the loan’s term may be extended.

Refinancing

To refinance your home loan, you’ll need to be current with your mortgage payments. A refinance replaces the old loan agreement with a new loan document. The terms of the new loan agreement may have a lower interest rate and the term of the loan may be different.

Sell Your Home 

Some borrowers facing foreclosure may choose to sell their homes to avoid foreclosure. A real estate broker may help you put your house on the market. The mortgage is usually paid off with the proceeds from the sale. Sometimes the mortgage debt may exceed the value of the home. If this is the case, you will need lender approval to sell your home. This is called a short sale. The downside to a short sale is that you may be responsible for the remaining balance due under the loan document. 

Deed In Lieu 

Deed in Lieu happens when the lender agrees to allow you to transfer ownership in the property to the lender to satisfy a loan that is in foreclosure. 

Reinstatement Of Mortgage

If you’re in default on your mortgage, you may be able to avoid foreclosure by paying all the missed payments and late fees. This is called reinstatement of the mortgage. 

Chapter 13 As A Mortgage Relief Option

Filing a Chapter 13 bankruptcy may help a homeowner save their home from foreclosure. A homeowner can keep their house after filing Chapter 13 and pay their missed mortgage payments over time through a repayment plan. The homeowner will also have to keep up with their regular mortgage payments. A homeowner in Chapter 13 can also seek a loan modification. Chapter 13 bankruptcy is much more complex than a Chapter 7 bankruptcy process; it’s best to speak with a bankruptcy lawyer in your area to find out whether it’s the right solution for your situation. 

Let’s Summarize...

Mortgage forbearance is an option for short-term mortgage relief. It doesn’t offer a long-term solution. It will save a homeowner from foreclosure temporarily. Missed payments will have to be cured. This temporary relief may offer a homeowner time to figure out the next step. 

The Federal Housing & Finance Agency, (FHFA) has issued moratoriums on single-family foreclosures and evictions for Fannie Mae and Freddie Mac loans until June 30, 2021. After the moratoriums expire, long-term solutions will be needed. To avoid foreclosure, most people consider loan modifications, refinances, or Chapter 13 bankruptcy for a more permanent solution to considerable financial challenges impacting their abilities to repay their loans.