How to Come Out of Mortgage Forbearance

·8 min read

Mortgage forbearance offered much-needed relief to millions of homeowners during the coronavirus pandemic, but now many borrowers are leaving the programs. The CARES Act established forbearance programs last year for federally backed mortgages, but private lenders and servicers often provided their own options.

Forbearance is when your lender or servicer allows you to pause or reduce your mortgage payments, but you are still responsible for paying back what you miss.

Although the economy is now improving, not all homeowners are financially stable yet. The number of homeowners in forbearance dropped from 4.1 million in May 2020 to 2.2 million in May 2021, according to Mortgage Bankers Association estimates.

Those in forbearance will have to decide how to move forward, whether by extending protections for a few months, or exiting forbearance and resuming mortgage payments. Here's what to know about your options and what your loan servicer will expect from you.

[Read: Best Mortgage Lenders.]

Can You Extend Your COVID Forbearance?

If you're in a mortgage forbearance program and you can't afford to resume your monthly payments, you might be able to continue your hardship plan. The details will depend on the type of home loan you have and when you requested the forbearance.

For government-backed loans: If your mortgage is insured by the Department of Veterans Affairs, the Federal Housing Administration or the Agriculture Department, you can request up to two additional three-month extensions for a total forbearance of 18 months. This benefit is available to homeowners who requested a forbearance plan by June 30, 2020, but not everyone will qualify for the maximum.

For loans backed by Fannie Mae or Freddie Mac: Homeowners may ask for up to two additional three-month extensions for a maximum of 18 months of forbearance. You are eligible if you were in a forbearance plan before Feb. 28, 2021.

Call your mortgage loan servicer to request the forbearance extension or to see who owns the loan. You'll usually find contact details on your latest loan statement, on your credit reports or at the Mortgage Electronic Registration Systems website.

If you're struggling financially because of the pandemic and would benefit from a mortgage forbearance, act fast. Those with FHA, USDA or VA loans must request this protection by June 30, 2021.

Luckily, you have no deadline to request an initial forbearance if your mortgage is owned by Fannie Mae or Freddie Mac.

[Read: Best Mortgage Refinance Lenders.]

What Happens When Your Forbearance Ends?

Your loan servicer may contact you 30 days before your mortgage forbearance ends to go over next steps. If you haven't heard from the servicer, get in touch as soon as possible. Of course, you can also exit forbearance early if you're ready to resume payments.

Either way, you'll need to make up payments you missed during the forbearance period. Loan servicers typically can't ask for them as one lump sum, though. Instead, they're required to offer flexible plans if the homeowner has a federally backed mortgage.

"A lot is going to have to do with what the borrower can afford and then also what programs are available based on the mortgage that they have," says Jim Block, executive vice president and chief operating officer of BCU, an Illinois-based credit union.

Typical options may include:

Payment deferral. This plan allows you to delay your missed payments until you sell the home, refinance the mortgage or pay off the original home loan.

About a quarter of homeowners who leave forbearance choose payment deferral, making it the most popular option. Deferral is usually available for Fannie- and Freddie-backed loans, VA loans, FHA loans, and USDA loans.

"If your income is still a bit constrained and you can't increase your monthly payments, that's where I would add the payments to the end of the loan," Block says. "The downside of that is that your mortgage will last longer."

Repayment plan. You can create a repayment plan with your loan servicer if you have a mortgage backed by Fannie Mae or Freddie Mac or an FHA, VA or USDA loan.

You'll spread your unpaid balance over a certain period of time, such as six, nine or 12 months, on top of your regular mortgage payments. This is a good option if you can temporarily afford higher payments and don't want to extend your payoff timeline.

Loan modification. Borrowers with VA or Fannie or Freddie loans may ask their servicers to change their loan terms. The servicer could agree to lower your interest rate, lengthen your loan term or even forgive some of your principal balance.

Before agreeing to a loan modification, ask your loan servicer how you will make up the missed payments and how your loan will be reported to the credit bureaus. The loan servicer may add a comment code to your credit report that says something like "paying by modified terms."

Lump-sum payment. This might work "if the homeowner has savings built up and they didn't have an income disruption," Block says. But with all federally backed loans, your servicer can't require this type of payment. If the servicer mentions it, ask about other options so you can make an informed choice.

Many private lenders have also extended forbearance protection to borrowers, even though they're not required to by law. If your mortgage isn't federally backed, the Consumer Financial Protection Bureau suggests calling your loan servicer and asking about forbearance repayment options and fees that may apply.

You can also check whether your state offers additional mortgage relief options, including a suspension of foreclosures.

[Read: Best VA Loans.]

What Should You Do if Your Forbearance Ends Soon?

Take time to put a plan in place if you're about to leave a forbearance program. Here are some steps you can take to prepare:

Look at your budget. Your loan servicer will want to know whether you can afford to resume normal payments and how you will catch up on missed payments. You might decide to request a repayment plan if you can afford larger payments or a deferral if money is still tight.

Paying down the balance with a lump sum might be a good idea if you have the money, plus enough left over for an emergency fund.

Expect delays when contacting your loan servicer. Loan servicers are preparing for a deluge of customer calls in the coming months, as nearly 1.7 million borrowers are expected to exit forbearance programs this fall. You could experience long call wait times, inconsistent customer service and process changes as regulators modify forbearance and foreclosure rules.

Talk with a certified housing professional. If you're not sure whether you can afford your mortgage payments, consider working with a housing counselor.

"People who go through counseling are much less likely to foreclose than those who do not," says John W. Mallett, founder and president of MainStreet Mortgage, a mortgage brokerage.

Check your credit reports. Lenders should report your loan as current if it was in good standing when you entered a forbearance program. Check your credit reports to make sure they reflect the agreement you made with your lender once you exit your mortgage forbearance plan.

You may want to check regularly because the change could take a month or two to appear on your reports. You can dispute any inaccuracies by reporting them to the loan servicer and the credit bureaus.

Consider refinancing your mortgage. Refinancing involves replacing your original loan with a new one, ideally with a better interest rate. "The refinance will have a direct impact because the borrower's payments will likely be more affordable for the long term," Mallett says.

The process of refinancing after forbearance depends on who owns your mortgage. If Fannie Mae or Freddie Mac owns your loan, you will need to make at least three consecutive timely mortgage payments before you can refinance. FHA loans may require you to make three to six months of on-time payments before refinancing.

What if Forbearance Is Ending but You Can't Afford to Stay in Your Home?

Some homeowners continue to experience money problems after forbearance, even after exhausting their payment options.

"If you recognize that you can't afford the home, act on that knowledge," Block advises.

What to consider:

Foreclosure. In a foreclosure, the bank repossesses your property if you fall behind on mortgage payments. You will have to move out, you will lose any equity you've built in the home and you could do serious damage to your credit.

If you're struggling financially, reach out to your lender as soon as possible.

The lender may be willing to work out a solution, such as a loan modification, because "it's in everyone's best interest to keep the homeowner in their home," Block says.

You might also consider talking with a housing lawyer or looking for free legal services.

Sell your home. Low home inventory and a flood of homebuyers looking to take advantage of low interest rates have helped push home prices to record highs across the U.S. If you know you can't make your mortgage payments, then you may consider selling your home and finding more affordable housing.

"In this hot, hot housing market, you may receive multiple offers and get more than what you asked for," Block says. "If the bank has to take over the house, you're not going to benefit from that."

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