- What Does Forbearance Mean On A Loan
- Mortgage Forbearance: Understanding The Basics
- Forbearance Vs. Deferment Student Loan
What Does Forbearance Mean On A Loan – As an independent mortgage broker, it is paramount to understand how the current market climate is impacting the mortgage industry, your real estate partners and borrowers. With the recent passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, many mortgage professionals and homeowners are wondering what impact this bill will have on their lives and livelihoods. Forbearance in particular is a hot topic, but it’s not the only option available to homeowners in need. In this blog, we’ll explore what forbearance entails and what additional loan modification and repayment options loan servicers can offer homeowners as an alternative.
According to the Consumer Financial Protection Bureau, the definition of forbearance is a temporary suspension of payment on a loan, such as a credit card, student loan or mortgage. Denying credit to homeowners in the age of coronavirus is one of the tactics the federal government has proposed to ease the growing economic pressures facing everyday Americans. However, it is important to note that mortgage forbearance is not available to all homeowners and that the guidelines are different for government-backed mortgages and privately backed mortgages.
What Does Forbearance Mean On A Loan
It’s also important to note that while loan forbearance may sound helpful to consumers in the short term, it can actually be financially challenging shortly thereafter. The deferment is simply a temporary suspension of monthly mortgage payments. Unless homeowners make individual arrangements with their loan servicer regarding loan modifications or repayment plans, all payments will be owed at once when the forbearance period ends.
Mortgage Forbearance: Understanding The Basics
“Forbearance is not forgiveness. Deferment does not release the borrower from his obligations, but rather offers people in need temporary payment relief. That’s why it’s essential for borrowers to work with their (loan servicer) to determine which option best suits their needs.” – Willie Newman, CEO of Home Point Financial
The CARES Act is the largest stimulus package in American history and is designed to prevent economic hardship for businesses and individuals affected by the COVID-19 pandemic and mitigate the downturn in the economy. The bill allows single-family homeowners with federally backed mortgage loans (Fannie/Freddie/FHA/VA/USDA) to request a temporary suspension of their mortgage payment for an initial period of up to 180 days, with the option to request an extension from the servicer for up to to another 180 days. The deferment period may not exceed a period of 12 months.
For typical homeowners, the CARES Act outlines options for so-called forbearance agreements, or the ability to temporarily suspend monthly mortgage payments for those impacted by COVID-19. Borrowers should contact their servicers if they are unsure whether they have a qualifying mortgage to see what their specific options are.
For investors and owners with multifamily mortgages, there are also forbearance options for up to 90 days, granted in 30-day increments. This applies to federally insured, guaranteed, supplemented or backed mortgages, including mortgages purchased or securitized by the GSEs.
Forbearance Vs. Deferment Student Loan
Read a summary of the CARES Act and find additional updates on how the coronavirus stimulus package is impacting the mortgage industry on our legislative updates page.
A forbearance agreement can vary from servicer to servicer depending on whether the loan is federally insured or not. In general, a typical cease and desist agreement may look like this:
One of the difficulties with forbearance is the burden it can place on the homeowner after the forbearance period expires. Because this is a temporary option, the monthly mortgage payments are only deferred until a later date, resulting in a balloon payment due after the forbearance period expires unless the homeowner has other loan payment arrangements in place with the lender. A lenient homeowner should only use this option for financial reasons, as attempting to pay a large amount equivalent to multiple monthly payments at once may be difficult or impossible, and servicers are not required to provide borrowers with all alternative options CARES- Law.
With an additional loan payment option, they are required to resume payments on their loan and repay the total amount missed during the forbearance period – all at the same time. Forbearance is not a one-size-fits-all solution, and loan servicers may offer a variety of loan payment options. However, it is up to the homeowner to proactively research the best option for their situation by contacting their loan servicer. Loan payment options are generally described in one of the following ways.
Mortgage Forbearance Vs. Deferment: What’s The Difference?
A deferment occurs when overdue payments are postponed to a later date. The balance of the loan is due either on the mortgage maturity date, the repayment date, or upon sale of the property, and deferment is typically only possible following missed mortgage payments that impact the borrower’s credit rating. The borrower must contact their servicer to determine whether they are eligible for forbearance.
Here, a borrower is obliged to pay all outstanding payments in a lump sum by a certain date. This is done according to a deferral plan unless otherwise specified in the agreement. If the loan comes back into effect after the forbearance period has expired, this typically has no impact on the borrower’s creditworthiness.
This allows a borrower to repay past due payments with regular payments over an extended period of time to bring the loan back into current status. This is usually granted to borrowers who can demonstrate a financial need for a repayment plan because they would otherwise be unable to repay the loan.
This occurs when a lender changes the terms of a mortgage after the borrower has defaulted to avoid foreclosure, usually after a trial period of the repayment plan. This may include extending a deadline for the loan to end or changing the amount required for each payment. A loan modification is typically only offered after a borrower has missed one or more payments and impacts the borrower’s credit score.
Understanding How Mortgage Forbearance Works And Your Options
Loan forbearance and loan deferment are two different options that struggling homeowners may consider, but there are significant differences between the two. As stated above, payments during a mortgage loan forbearance are due in full when the forbearance period ends, unless an alternative payment option has been agreed upon with your loan servicer. Typically, a deferment period will not exceed 12 months at a time and interest will continue to accrue during the temporary deferment period.
A mortgage loan deferment is the delay of payments for a specific period of time due to extenuating circumstances and is often used as a final step in avoiding foreclosure. Deferral options are not available with all providers, may be more difficult to qualify for, and may require more detailed documentation during the deferment evaluation process. With a loan deferment, a borrower postpones their mortgage payments, including principal and interest, until a later date. The loan balance is due on either the mortgage maturity date or the repayment date
The length of the loan term and payment schedule remain the same, but the deferment period may vary depending on the type of deferment. Each loan servicer may have multiple types of forbearance. Since these vary from lender to lender, homeowners will need to contact their individual loan servicer to review the options available to them. In addition, a forbearance period can last up to a few years and no interest accrues on the mortgage loan during the forbearance period. Servicers may not approve all deferral requests and may be more difficult to qualify for because the deferral is not guaranteed by the CARES Act.
In addition to forbearance and deferment, servicers may also offer other options for homeowners in distress, such as loan modifications or repayment plans. These options vary from lender to lender and on a case-by-case basis and may require additional financial documentation from your bank or other sources to demonstrate financial hardship and qualify.
What Are The Negatives Of Forbearance?
As a mortgage professional, it is important that you are able to provide factual information about the complex market and regulatory information and its impact on your clients. Here are five talking points you can use to educate your borrowers and referral partners.
A forbearance agreement only allows homeowners to temporarily pause their mortgage payments, but once the forbearance period expires, all payments are due. This could prove difficult for borrowers who expect payments to be deferred rather than temporarily suspended. Ultimately, they could be surprised to find themselves responsible for several months of mortgage payments at once after the forbearance period expires if a loan modification or other repayment options were not specifically agreed upon with the lender in advance.
The Department of Housing and Urban Development (HUD) has issued forbearance guidelines for borrowers with an FHA loan. This includes the COVID-19 National Emergency Partial Claim as an option for FHA borrowers at the end of a forbearance period.
The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, has implemented guidelines to assist servicers with liquidity and provided guidelines for servicers to follow when providing repayment options to borrowers. The agency also partnered with the Consumer Financial Protection Bureau (CFPB) to create the Borrower Protection Program to ensure accurate and fair credit scoring
Which Is Better: Forbearance Or Deferment?
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