What Does Forbearance Mean for You?
Have you been dealing with job loss or an illness that prevented you from working? The loss or reduction in income could make it difficult for you to pay your mortgage. When doing so would increase your financial hardship, it can be reassuring to know that you have options.
You are not alone in this situation. Many homeowners face similar hardships, especially in recent times. Fortunately, most servicers will work with you and offer a forbearance agreement. There are even some federal requirements for them to do so.
What is Forbearance?
A forbearance plan is an agreement with your servicer that provides a period of reduced or suspended payments when you have a temporary hardship. While the borrower is not required to make payments, the loan still accumulates interest, and payments can be deferred or added to the end of the loan period for government loans.
Do I Get Charged Penalties?
No interest, fees, or penalties can be charged apart from those already specified by the original mortgage. Essentially, your loan is treated as though you continued to make your regular payments in full. In some cases, the loan can accrue negative amortization, meaning your postponed payments are added back to your loan balance.
What About Conventional Loans?
On conventional loans, forbearance allows the payments to be suspended for a specified period determined by your servicer. If you continue to make payments during your forbearance period or pay off the balance of missed payments before the expiration date of forbearance, the missed payments may not be considered delinquent!
Do I Have to Pay Back the Missed Payments?
Forbearance does not mean your payments are forgiven or erased. You are still required to repay any missed or reduced payments in the future, in most cases, over time. At the end of your forbearance period, your servicer will contact you about how you can repay the missed payments. There may be a few different options available.
The specific terms of your forbearance agreement largely depend on your situation as well as your servicer’s willingness to work with you. Before considering forbearance, you should know the players in your mortgage.
Who Handles Your Mortgage?
Your loan originator (who you used when you bought your home) will not always be the same as your servicer (to whom you make payments). Your mortgage is usually sold to aggregators or agencies like Freddie Mac, Fannie Mae, and Ginnie Mae.
Along with the borrower, banks stand to lose a lot of their investment in the event of a foreclosure. They would rather issue postponed payments now, hoping that the borrower will resume payments in the future, rather than take on a massive loss by foreclosing.
That being said, loan servicers are not in the same position. Servicing agencies only profit when you do pay, meaning they do not have the same incentive to be lenient on payments. That does not always mean that they are unwilling to help should you find yourself in a challenging position, but keep in mind that your relationship with the servicer is essential in the decision to grant a forbearance agreement.
Who Is Eligible for Forbearance?
Your servicer’s willingness to grant a forbearance agreement will depend on a variety of factors, including the reason for your request.
How Do I Qualify for Forbearance?
Under the 2020 CARES Act, you may qualify for forbearance on any federally backed loan (FHA, VA, USDA, or agency loans like Fannie Mae and Freddie Mac) if you have experienced job loss, illness, lost income, or other hardship related to COVID-19. Because these guidelines are temporary, you should check with your servicer to see if you are eligible for COVID-19 forbearance terms.
However, forbearance is also available for conventional loans provided you are on good terms with your servicer and can make a strong case for why you need to postpone your payments. As previously mentioned, servicers will be more willing to work with you if they can trust that you will continue to make payments in the future.
Strong Forbearance Requests
While federally backed loans are guaranteed to receive forbearance agreements, you can strengthen your case for a conventional loan if you have maintained a good record of on-time payments.
Contrary to what you might think, your credit score does not play a part in whether you receive forbearance since it is not an extension of credit. However, missed payments or previous instances of forbearance can make your servicer hesitant to grant a new agreement.
Is Forbearance Right for You?
If you are considering requesting forbearance from your servicer, keep in mind the following questions:
- Will you be able to catch up on your payments later?
- Are you current on your loan?
- Will it be a hardship to continue making your mortgage payments today?
- Is your financial hardship a common occurrence or a unique circumstance?
What are the Terms of Forbearance?
The terms of your forbearance will largely depend on your lender and the agreement you make together. However, for federally backed loans, there are some government requirements.
Fannie Mae & Freddie Mac
Due to the 2020 CARES Act, borrowers are entitled to up to 12 months of forbearance. Along with the required forbearance offering, servicers must also offer a permanent repayment plan once the forbearance ends.
Penalties that would typically accompany forbearance are also suspended, such as reporting to credit bureaus or charging late fees.
All occupancies are allowed, including investment properties.
Are There Any Consequences to Forbearance?
While many of the consequences that would typically come with forbearance have been suspended due to the CARES Act, there are still side effects.
Forbearance may affect your ability to refinance your mortgage immediately after your forbearance period ends. Each type of loan has different requirements outlined here:
Generally, a borrower who was granted Mortgage Payment Forbearance is eligible for a new FHA mortgage provided the following:
- The borrower continued to make regularly scheduled payments, and the forbearance plan is terminated.
- Cash-Out Refinances – you have completed the forbearance plan and made at least 12 consecutive monthly payments after forbearance.
- Purchase and No Cash-Out Refinances – you have completed the forbearance plan and made at least three consecutive monthly payments after forbearance.
- All Streamline Refinances – you have made at least six payments on the FHA mortgage being refinanced. (If the mortgage had been modified after forbearance, you must have completed at least six payments under the modification.)
VA loans require loan seasoning before refinancing. Loan seasoning requirements are both:
- the date on which the borrower has made at least six consecutive monthly payments on the loan being refinanced, and
- the date that is 210 days after the first payment due date of the loan being refinanced
This applies to cash-out refinancing loans made to refinance a VA-guaranteed loan. CARES Act forbearance periods do not count towards the loan seasoning requirements for Interest Rate Reduction Refinancing Loans or cash-out refinancing loans.
For non-streamlined and streamlined refinances, the mortgage must have closed at least 12 months before a refinance is requested. You will also need to have made payments for at least three months and have a total 180-day period of satisfactory payments, excluding the loan’s time in forbearance.
Conventional Fannie Mae and FHLMC
Under the temporary guidelines, if you have missed payments and entered into forbearance or other payment plan or modification, you will need to have three monthly payments before you can refinance. There is no waiting period if you missed payments due to a COVID-19 hardship and have since paid back the full missed amount or if you were able to continue making your payments on time.
Know How You Will Pay It Back
Making sure you understand how the forbearance will be repaid is crucial. There can be different forbearance programs or options, depending on the type of loan you have.
For example, if you have a Fannie Mae, Freddie Mac, FHA, VA, or USDA loan, you won’t have to pay the amount that was suspended all at once. Although, it is recommended if you can afford to do so.
Due to the COVID-19 pandemic, many lenders are offering either forbearance or payment deferment. While these are both types of payment relief that allow you to pause or add the missed payments to the end of the loan, they are different. Interest always accrues when payments are in forbearance, but interest is only sometimes accrued with payment deferment.
On conventional loans, forbearance typically allows you to make payments or repay the paused amount in one lump sum at the end of the period. On the other hand, deferment lets you make repayments over time, and the balance of the missed payments is added to the back of the loan.
What If I Am Still Facing Hardship
If you are still unable to pay your mortgage at the end of your forbearance period or you cannot afford the repayment plan you are offered, you still have some options.
Extending Your Forbearance
Contact your servicer to find out if you can extend your forbearance. If you are not yet at a total of 12 months of forbearance, you may be able to get an extension.
You may be able to adjust your forbearance agreement to get a payment deferral. Instead of repaying the amount owed during your forbearance, you will resume your regular monthly payments and make extra payments at the end of your loan.
Permanent Payment Reduction or Loan Modification
In some cases, your servicer may be willing to adjust your loan to accommodate a lower payment permanently. A lower payment might mean a rate reduction or lengthening of your loan term. Keep in mind that this should be a last resort, and you should try to make your regular monthly payments whenever possible.
Consider Your Options
Although forbearance is an excellent option for those who have suffered financial hardship and can help you keep your home, you should still consider all of your options before contacting your servicer. Your relationship with your servicer will play a significant role in whether or not forbearance will be an option, so your best bet is to pay on time and adhere to any agreements.
To learn more about the options available to On Q Financial servicing clients, contact us, and we will connect you with an agent who is ready to help you.
*Information is subject to change without notice. This is not an offer for extension of credit or a commitment to lend. Some restrictions may apply.
About the Author
Before opening On Q Financial in 2005, John Bergman originated and funded 450 units a year as a loan officer. He founded the company with just $1M of personal life savings—committed to his vision for building the best independent mortgage organization in the industry.View John's Profile