How to bounce back from mortgage forbearance

Q: We asked our mortgage lender for forbearance last year after two job losses in our household. We are now back in the workplace, and while things are rickety, how can we make up the mortgage payments we missed?

A: Several million homeowners entered forbearance plans during 2020 under the COVID-19 relief options developed for those with financing that involved the FHA, VA, USDA, Freddie Mac and Fannie Mae. In general, borrowers were allowed to request 180 days of forbearance twice, meaning essentially, they could go as long as a year under the original program.

In February, President Biden announced a forbearance program extension to “provide up to six months of additional mortgage payment forbearance, in three-month increments, for borrowers who entered forbearance on or before June 30, 2020.” In addition, homeowners can request forbearance for the first time until June 30, 2021. For details and specifics speak with your mortgage lender.

It’s easy enough to get forbearance, the question is what happens when forbearance ends. The good news is that the forbearance program has several exit options that generally allow borrowers to keep their homes and not wreck their finances. Here are the four available choices.

Lump-sum repayment: In this case you go for “reinstatement” by writing a check for all missed payments. Example: You did not make four monthly payments of $1,200 each. You repay the debt with $4,800. Important: Lenders cannot require lumpsum repayments under federal rules.

Repayment plan: You did not make payments worth $4,800. With new employment you start to make your regular payments, $1,200 a month. In addition, you pay a given amount, say $100 per month, until the outstanding debt is repaid. This increases your total monthly payment to $1,300 a month in this example.

Deferral: It might be that as a result of the pandemic you lost income and now have additional debts or lower wages. A repayment plan with higher monthly costs may not work for you. In this situation ask the lender about deferral (partial claim) options. With a deferral you can add the unpaid debt to your loan and repay when the home is sold or refinanced. Or the lender can create a junior lien to be paid off when the property is sold or refinanced. In either case the effect is the same, your monthly payments are not increased and the debt becomes payable at some point in the future.

Modification: If affordability is an issue, then you might look for a loan modification. According to the Consumer Financial Protection Bureau (CFPB), with a modification, “your payment can be reduced to an affordable amount and your missed payments will be added to the amount you owe. Your monthly payments could also be lower, but it could take longer to pay off your loan.” In other words, the loan term is stretched out, so the monthly payments are lower.

The CFPB also says that “modifications may involve extending the number of years you have to repay the loan, reducing your interest rate, and/or forbearing or reducing your principal balance.”

With these options in mind, speak with your lender to see what choice is best in your situation.