Forbearance

What is a Forbearance?

With this option, you and your mortgage company agree to temporarily suspend or reduce your monthly mortgage payments for a specific period of time. This option lets you deal with your short-term financial problems by giving you time to get back on your feet and bring your mortgage current.

Forbearance may be an option if you are:

  • Behind on your mortgage payments or on the verge of missing payments
  • Experiencing a temporary hardship

How does it work?

Forbearance reduces your monthly mortgage payment—or suspends it completely—during the forbearance period. If you qualify for forbearance, you and your mortgage company will discuss the forbearance terms:

  • length of forbearance period,
  • reduced payment amount (if the payment is not suspended), and
  • the terms of repayment.

After the forbearance has ended, you will need to repay the amount that was reduced or suspended. However, you are not required to repay the missed amount all at once, though you have that option. Other potential options allow you to make an additional payment each month for a period of time until the past due amounts are repaid, move the missed amount to the end of your loan term, or set up a loan modification, if you are eligible.

Payment Options After Forbearance Ends

Once your forbearance ends, you’ll have to make arrangements to repay what you owe (all of the missed payments during forbearance). The options for repayment vary by the loan type, so you need to contact your lender. Although you can pay what you owe in one lump sum, some of the loans MAY require a lump sum payment once forbearance ends. Again, communicate with your lender for more information. 

Homeowners In Forbearance Topple 1 Million

There are an estimated 1.6 million homeowners currently in various phases of forbearance, and that number continues to fall as more people exit forbearance.

After the initial set of forbearances expired on July 31, the number of loans in forbearance fell to 3.26% for the week ending on August 8 compared to 3.40% in the prior week, according to data from the Mortgage Bankers Association (MBA).

“The largest decrease in a month in the share of loans in forbearance came from a jump in forbearance exits, as many homeowners are nearing the end of their forbearance terms. The forbearance share declined for all investor and servicer categories,” said Mike Fratantoni, senior vice president and chief economist at MBA, in a press release.

New Rule Helps Struggling Borrowers Avoid Foreclosure

Preventing foreclosure is the most important goal when exiting forbearance. Whether you choose to modify your loan, go with a payment option for the months you missed or sell your home, all of these are better options than losing your home in foreclosure.

Foreclosure is emotionally and financially damaging. According to Experian, homeowners can see as much as a 100-point reduction or more to their credit score after foreclosure. This kind of blow can affect your ability to rent, buy, apply for new credit and even get a job. Communication with your lender is the key.

To help homeowners avoid foreclosure, the Consumer Financial Protection Bureau issued a rule in place that will require lenders to follow three steps before starting a foreclosure, which include:

  1. The loan servicer must review a loss mitigation application submitted by the borrower that shows the borrower’s financial and household information, which can help the lender determine next steps.
  2. Loan servicers must follow state and local laws to verify that the home has been abandoned before proceeding with a foreclosure.
  3. Loan servicers must make a diligent effort to contact the homeowner before going forward with the foreclosure. Foreclosure is allowable in the event homeowners are a minimum of four months behind on their mortgage, and have been unreachable for more than 90 days.

The CFPB’s new rule goes into effect from August 31 through January 1, 2022. As long as the loan servicer adheres to these rules, they can file a foreclosure if necessary.

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