With the COVID-19 pandemic continuing to wreak havoc around the globe, many homeowners have found themselves underemployed, if not completely out of a job. While this will be a temporary situation for the majority, there are still bills that need to be paid - including the mortgage. How can homeowners who are clearly not at fault for their lack of sufficient employment navigate through this time?
One option is mortgage forbearance. This article will discuss what mortgage forbearance is, what it involves, and whether you should agree to this plan.
What is Mortgage Forbearance?
According to one definition, a mortgage forbearance agreement is:
An agreement made between a mortgage lender and [a] delinquent borrower in which the lender agrees not to... foreclose on a mortgage and the borrower agrees to a mortgage plan that will... bring the borrower current on his or her payments.
In essence, a mortgage forbearance plan is designed to help homeowners that are suffering from temporary economic hardship weather the storm. The way a forbearance agreement accomplishes this is to defer penalties against the homeowner while a plan is worked out that enables the homeowner to recover from his/her financial setback and "catch up" on late payments.
It goes without saying that the coronavirus pandemic has highlighted this option among many lenders. For example, Fannie Mae and Freddie Mac have offered forbearance help to many borrowers as a response to the crisis.
What Does Mortgage Forbearance Involve?
It is important to note that mortgage forbearance is not the same as "debt forgiveness." The homeowner is still expected to pay back the full amount that he or she owes to the lender. However, in light of the adverse economic circumstances in which the homeowner finds himself, the lender extends the option to agree to a payment plan, which could last for two, three, six, or 12 months (or any other number of months).
As an example of how a mortgage forbearance agreement may work, imagine that lender A agrees to temporarily suspend homeowner B's mortgage payment for 3 months. During that time period, the amount of B's payment that was suspended will continue to accrue, and at the end of the 3 month forbearance period, B will be accountable for paying back the difference to A, on top of the regular monthly payments.
Since B will likely not have enough money to repay the suspended amount in one lump sum payment, A allows B to repay within a 6 month period - in other words, for 6 months after the forbearance period ends, the homeowner will pay the regular monthly amount, plus an additional amount that will cover the suspended payment plus any interest over a 6 month time frame.
In order to apply for a mortgage forbearance, you'll need to contact your bank or lending institution. They will likely need to examine:
- Your proof of income, including documentation such as check stubs, bank statements, statements for unemployment assistance, etc.
- Documentation of your hardship; what constitutes acceptable documentation may vary from lender to lender
- A detailed breakdown of your monthly household expenses, including utilities, groceries, fuel, and so forth
Is Mortgage Forbearance the Best Option for You?
Mortgage forbearance offers definite advantages for homeowners suffering from short-term economic hardship. However, there are alternatives that you may want to consider. These may include:
- Loan modification, which often enables homeowners to pay lower monthly premiums over an extended period of time
- A short sale, in which a lender allows a homeowner to sell his or her house for less than the remaining amount on the mortgage
- Voluntary foreclosure, in which a homeowner can walk away from a home loan by giving up the residence
While there are several options available to you, you don't want to make a hasty decision. If you are a homeowner that's suffering from economic hardship, whether related to COVID-19 or not, reach out to a local expert loan officer today to discuss your options, including mortgage forbearance.