The outbreak of coronavirus triggered forbearance assistance beginning on March 18, 2020. In the aftermath of the economic crisis of 2020, legislation and policies have sought to assist homeowners who have struggled to make mortgage payments.
• A mortgage forbearance agreement is a plan devised by a lender and a borrower who is struggling to make mortgage payments to allow the borrower to fulfil the mortgage obligation and avoid foreclosure.
• Generally, the agreement reduces or suspends mortgage payments for a set period of time during which the lender agrees not to foreclose on the property.
• It is designed for borrowers with temporary financial difficulties and is not a long-term solution.
• A lender may agree to extend a mortgage forbearance agreement beyond its initial expiration date in certain circumstances.
How a Mortgage Forbearance Agreement Works
A mortgage forbearance agreement is created when a borrower is unable to make payments. The agreement stipulates that the lender will reduce or suspend mortgage payments for a specified time period. Additionally, they agree not to initiate a foreclosure during the period of forbearance.
In addition to resuming the full payment at the end of the grace period, the borrower must pay an additional amount to catch up on missed payments, including principal, interest, taxes, and insurance. The agreement's terms will vary between lenders and situations. Even if payments are temporarily suspended under a standard forbearance agreement, interest continues to accrue.
For delinquent borrowers, a mortgage forbearance agreement is not a long-term solution. Rather, it is intended for borrowers who have temporary financial difficulties due to unforeseen circumstances, such as unemployment or health problems. Borrowers with more fundamental financial issues, such as having chosen an adjustable-rate mortgage whose interest rate has reset to an unaffordable level, must typically seek alternative solutions.
A forbearance agreement may permit a borrower to avoid foreclosure until his or her financial situation improves. If the borrower's hardship is not resolved by the originally agreed-upon end date, the lender may be able to extend the forbearance period in certain circumstances.
A loan modification is intended to be a permanent solution to unaffordable monthly mortgage payments rather than the temporary suspension or reduction of payments.
Mortgage Forbearance Agreement vs. Loan Modification
A mortgage forbearance agreement provides borrowers with temporary relief, while a loan modification agreement is a permanent and one of the best solution to unaffordable monthly payments. With a loan modification, the lender and borrower can work together to reduce the borrower's monthly payments by reducing the interest rate, converting a variable interest rate to a fixed interest rate, or extending the loan term.
To qualify for a loan modification, borrowers must demonstrate that they are unable to make their current mortgage payments due to financial hardship, prove that they can afford the new payment amount by completing a trial period, and provide the lender with all required documentation. Depending on the lender, the required documentation may include a financial statement, income verification, tax returns, bank statements, and a hardship statement.
The economic crisis legislation of 2020 provides special mortgage forbearance assistance to homeowners with federally-backed home loans, including Fannie Mae, Freddie Mac, FHA/HUD, VA, and USDA loans.
Mortgage Forbearance Agreements and COVID-19
The economic crisis legislation of 2020 provides special mortgage forbearance assistance to homeowners with federally-backed home loans. This includes mortgages from HUD/FHA, VA, USDA, Fannie Mae, and Freddie Mac. To qualify for COVID-19 mortgage forbearance, you must have experienced direct or indirect financial hardship as a result of the coronavirus pandemic.
Although non-federally backed private mortgages are not covered by the law, private loan servicers may offer similar forbearance options. Even if your loan is not federally backed, loan servicers are generally required to discuss payment options with you if you are having trouble making your mortgage payments.
Eligibility
You are eligible for COVID-19 mortgage forbearance if you have a HUD/FHA, VA, USDA, Fannie Mae, or Freddie Mac mortgage AND you are experiencing direct or indirect financial hardship as a result of the coronavirus pandemic. No hardship evidence is required.
Deadline to Apply
The deadline to apply for an initial forbearance on a HUD/FHA, USDA, or VA loan was June 30, 2021, but the White House had announced at the end of July that the enrollment period would be extended to September 30, 2021. There is currently no deadline for requesting an initial forbearance if your mortgage is backed by Fannie Mae or Freddie Mac.
Since private loans are not governed by COVID law, private mortgage COVID-19 loan forbearance is negotiable with the lender. The application deadline, if any, is therefore determined by the mortgage servicer.
The application deadline is for "initial forbearance" (which is typically 3 to 6 months). Once you have applied for and been granted forbearance, you may request an extension of up to one year.
Length of Forbearance
As COVID-19 forbearance is governed, it has a specific duration. Most initial forbearance agreements are scheduled to last between three and six months and can be renewed for up to a year. Depending on when you began your initial forbearance, you may be eligible for a total of up to 18 months.
• You may request up to 18 months of total forbearance if your mortgage is backed by Fannie Mae or Freddie Mac AND you were in an active forbearance plan as of February 28, 2021.
• If your mortgage is backed by HUD/FHA, USDA, or VA, and your initial forbearance began on or before June 30, 2020, you may request an additional 18 months of forbearance.
Other Provisions of COVID-19 Mortgage Forbearance
COVID-19 mortgage forbearance agreements also contain provisions that are non-negotiable, which may or may not be present in standard mortgage forbearance agreements.
• Payments may be postponed or lowered.
• Interest accumulates without being capitalized.
• There will be no additional fees or penalties imposed.
Homeowner Assistance Fund
The passage of the American Rescue Plan Act of 2021 included the nearly $10 billion Homeowner Assistance Fund, which is intended to be distributed to states and used to assist homeowners who are at risk of foreclosure or eviction.
Funds will also be used to assist homeowners in avoiding mortgage and housing-related delinquencies, defaults, loss of utilities or home energy services, and other financial hardships.
When Forbearance Ends
At the conclusion of COVID-19 mortgage forbearance, your repayment options vary by agency. The prohibition against requiring borrowers to repay the deferred amount in a lump sum is a standard condition.
The following are typical repayment alternatives: Not all borrowers will qualify for all available options.
• Repayment - A portion of your outstanding balance will be added to your regular payment.
• Deferral/partial claim - Your missed payments will be added to the end of your mortgage or placed in a lien that will be satisfied when you refinance, sell, or cancel your mortgage.
• Modification - Your monthly payment will be reduced and the amount you owe will be added to the loan balance. Your loan will take longer time to repay.
• Lump-sum - You are not required to accept this option, which entails paying the entire delinquent balance in a single payment.
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