What is a Mortgage Forbearance Agreement?
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A mortgage forbearance allows you to stop making your mortgage payments if you encounter a sudden financial hardship. You can request a forbearance agreement if you’ve lost your job or your income has been reduced.
Many Americans are facing this predicament amid the coronavirus crisis, which has led to mass layoffs, reduced hours or pay cuts for many workers. As a result, lenders and the federal government are offering numerous forbearance mortgage options to keep people in their homes.
What is mortgage forbearance?
A mortgage forbearance is when a lender or mortgage servicer permits you to temporarily pause or lower your mortgage payments and avoid foreclosure.
To be clear, though, forbearance isn’t free money or loan forgiveness. The missed payments must be repaid later, or your loan will go into default and you may lose your home to foreclosure.
A forbearance agreement is meant to help homeowners through hardships, such as a sudden job loss or an extended illness without paid sick leave. As many Americans struggle with recent layoffs and illnesses due to the COVID-19 outbreak, the federal government is offering borrowers with federally-backed mortgages forbearance periods up to 12 months to stay afloat.
How a forbearance agreement works
If you’re eligible, your mortgage servicer will provide you with a forbearance agreement outlining the terms. It includes information about the forbearance term, how your payment history will be reported to credit bureaus and how the skipped payments will be repaid once the forbearance period ends.
The application process for a forbearance agreement varies depending on a number of different factors, including the type of loan you have, your loan servicer and the investor requirements on your loan.
There’s no set standard for the repayment schedule on a forbearance. Your lender might let you pay the entire past due balance in a lump sum at the end of the forbearance term. Or you might be able to extend the loan term and add the missed payments to the overall loan balance, said Sara Singhas, director of loan administration with the Mortgage Bankers Association (MBA).
Keep your mortgage current before you apply for forbearance
Borrowers who were making on-time payments before the emergency declaration may be eligible for more flexible repayment terms at the end of the forbearance period, Singhas said.
Other options (such as loan modification) are available to borrowers who were delinquent on their payments before applying for a forbearance that will vary depending on the mortgage servicer, Singhas added.
How to apply for a forbearance agreement during the coronavirus outbreak
The first step in the forbearance application process is to contact your mortgage servicer, or the company you make mortgage payments to each month.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27 and includes forbearance options with these features:
- The right to request a 180-day mortgage forbearance and one 180-day extension.
- Waiver of late fees for borrowers with a forbearance agreement
- Suspension of late-payment reporting to credit bureaus
- More affordable payment options after forbearance ends
The relief applies to homeowners with conventional loans owned by Fannie Mae and Freddie Mac, as well as government-backed loans insured by the Federal Housing Administration (FHA loans), the Department of Veterans Affairs (VA loans) and the Department of Agriculture (USDA loans).
Borrowers requesting forbearance under the CARES Act won’t have to provide documentation of their financial hardship. However, they’ll need to make an oral or written statement that they’re experiencing financial difficulty because of the COVID-19 outbreak, Singhas said.
Keep documentation of a layoff notice, pay stubs reflecting reduced earnings or medical bills in the event you still need mortgage relief after the forbearance period ends.
The effect of mortgage forbearance on your credit
Under the CARES Act, there should be no negative impact to a borrower’s credit score for payments missed during an approved forbearance period. But don’t stop making mortgage payments until you have a written forbearance agreement in place. Otherwise, the servicer will report late payments to the credit bureaus, which could hurt your credit scores.
Check your credit report to make sure your lender isn’t reporting forbearance payments as being late. If you find errors, dispute the information as soon as possible to avoid a drop in your credit scores.
Pros and cons of forbearance mortgage options
To help you plan for managing the back payments when the forbearance period ends, here are pros and cons of each of the three forbearance agreement plan options.
|Type of forbearance plan||Pros||Cons|
|Stop making payments for a set time and make back payments in a lump sum||No mortgage payment for a set period of time, typically 3 to 6 months||Entire balance of paused payments is due once the forbearance period ends
Interest accrues on missed payments
|Reduce payments for a set time, then pay back payments in a lump sum||Lower payment for the set time period
Lower balloon payment due at the end of the forbearance
|Balance of reduced payments due at the end of the forbearance period
Interest accrues on the unpaid portion of the payment
|Stop making payments for a set time, then add the paused payments to the end of the mortgage||No balloon payment at the end of the forbearance period
Gives you more time to pay back the missed payments
|Interest accrues on missed payments
Extends the life of the loan
Increases the loan balance
How your property taxes and insurance will be paid
If you have an escrow account set up to pay your annual property taxes and homeowners insurance premiums, your lender will continue to make those payments until the forbearance period ends. You’ll likely have an escrow shortage; you and your servicer will need to work together to figure out how to cover the difference, Singhas said.
Alternatives to forbearance
What it is: Lenders allow you to change the original terms of your loan permanently. Mortgage modification options may include extending the term of your loan, lowering your rate, or reducing your principal balance.
Who it’s best for: Borrowers who are 60 days or more behind on mortgage payments and are unable to make their current payments.
What it is: A refinance typically replaces your current mortgage with a new one with a lower interest rate and payment. Refinance options on FHA loans and VA loans are available with no-income verification or appraisal requirements.
Who it’s best for: Borrowers who can still qualify for a mortgage and need a little extra room in their budgets to make ends meet.
What it is: A short sale allows you to sell your home for less than its market value, and ask the lender to forgive the difference. There may be tax ramifications of a short sale, though, so check with a tax professional first.
Who it’s best for: Homeowners with little to no equity who want to avoid a foreclosure.
Deed-in-lieu of foreclosure
What it is: Also called a “cash for keys” transaction, a deed-in-lieu agreement lets you transfer ownership of your home over to your lender if they approve the request.
Who it’s best for: Homeowners who want to avoid foreclosure. In some cases, you may be eligible to receive some money for relocation assistance or stay in the home for up to a year as a renter.
Sell your home
Who it’s best for: Homeowners with enough equity in their homes to be able to pocket cash from the sale, and rent or live with family until they’re on a stronger financial footing to buy again.
Beware of forbearance mortgage relief scams
Whether you’re behind on mortgage payments or not, scammers may contact you posing as government agencies, mortgage relief organizations or attorneys. Follow these steps to avoid falling prey to their tactics:
- Never pay upfront for any advice or mortgage relief.
- Find a HUD foreclosure avoidance counselor in your area for free assistance.
- Don’t provide personal or financial information such as your Social Security number, date of birth, bank statements or credit card account numbers over the phone.
- Contact the Federal Trade Commission (FTC) if you believe you’ve been a victim of a mortgage relief scam.