mortgage forbearance CARES ACT

What is forbearance? As it applies to the mortgage process, it’s an agreement between a lender and a borrower to delay a foreclosure.

While the literal definition of forbearance is ‘holding back’, in practice it means something more akin to ‘taking a break’ and does not mean that the borrower is off the hook for any missed payments.

As of the start of September 2020, nearly 4 million mortgages are in active forbearance plans, largely due to the onset of the COVID-19 pandemic. That figure represents just over 7% of all active mortgages agreements and represents more than $800 billion in unpaid principal. On the plus side, some 75% of the agreements have had their terms extended or been resolved entirely. GSE mortgages alone have declined to the tune of 49,000 total as active forbearance plans and effected FHA and VA loans in forbearance declined by 23,000 total.

But just over 5% of all government-backed loans and more than 11% of all FHA/VA loans remain locked in forbearance plans and more than 7% of loans held by private lenders or banks are still in forbearance.

Foreclosure is a lengthy and untidy process for both the lender and the borrower and to avoid foreclosure, the lender and the borrower may agree to an agreement and it’s known as forbearance. This type of agreement calls for the lender to delay the right to foreclose on a note, but only if the borrower agrees to catch up with missed payments by a scheduled daate. The period for that hold is set by the lender and agreed upon by both parties to the loan.

While lenders are traditionally unwilling to enter into forbearance agreements, they have been known to grant it for customers in financial straits in the short term. If the borrower’s financial problems appear to be extreme and the likelihood of that borrower being able to sustain a full mortgage payment schedule, forbearance is not a solution. While every lender often offers a range of forbearance products, the onset of COVID-19 has led the government to offer forbearance measures which comply with the CARES Act.

This is how those measures work: at the end of the forbearance agreement consumers will be asked to participate in a work out plan or bring the mortgage payment schedule into currency. The options include paying off the loan in its entirety, modifying the terms of the note, continued deferral of payments or ramping up monthly payments to address the amount in arrears.

What to Know If You’re Behind On Your Mortgage – How Forbearance Might Serve You

What is more clear is that a forbearance is not loan forgiveness and that any interest amounts continue to accrue. Forbearance does not prevent a lender from seeking foreclosure later if the terms of the agreement aren’t met. It’s also crucial for borrowers to understand that credit bureaus will continue to report payment information, delinquency and mark past due payments.

But six months into the pandemic, many people who agreed to put their payments on hold will now need to decide whether to extend their time in a forbearance program or negotiate a payment plan with their lender to pay the deferred amount back.

  • What does ‘forbearance agreement’ mean?
  • Is forbearance a good idea for me?
  • How does a mortgage forbearance agreement work in practice?
  • What is a ‘forbearance letter’ and what does it contain?

The CARES Act dictated that homeowners impacted by the pandemic who are on the hook for government-backed loans are eligible to up six months of deferred mortgage payments and are, if they remain in good standing with their lender terms, are eligible for an additional six months of relief or a total of one full year of deferred payments. The bill also stops penalties and fees and the accrual of interest charged on those delayed payments.

How to Exit a Forbearance Agreement

First you’ll need to speak with your lender about a plan to exit forbearance and discuss your method of repaying the amount due.

The key takeaway is that the CARES Act protects buyers from being required to repay any deferred amounts in a single ‘balloon’ payment and that lenders offer a multitude of options for repayment depending upon circumstances.

If lenders can pay that lump sum to make the loan current, credit reports would be undamaged and a repayment plan with favorable terms means paying regular mortgage amounts – plus a bit more -over the coming year can erase the deferred amounts of the note.

Notes which are not government-backed may have to pay the deferred amounts in one lump and have no guarantee that they can stretch out the forbearance period.

Borrowers with loans covered under the CARES Act must be notified 30 days ahead of time that their forbearance period is coming to an end, and borrowers who hold private loans are likely to receive the same notification.

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