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Facing End of Forbearance? You've Got Options

Lenders will work with you to keep you in your home, but you have to contact them

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Some homeowners will soon come to the end of their 18-month mortgage forbearance period, and borrowers affected by the pandemic will have to figure out how to repay their lenders for back payments. Fortunately, most loan servicers don't want to foreclose, and they offer several repayment options than can help keep borrowers in their homes.

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Who qualifies?

If the Federal Home Loan Mortgage Corp. (Freddie Mac) or the Federal National Mortgage Association (Fannie Mae) owns your mortgage — and they do for about 80 percent of all mortgages — it may have temporarily suspended your payments for up to 18 months. Congress specified no deadline for applying for coronavirus-related forbearance from either of the two mortgage giants, although their regulator, the Federal Housing Finance Agency, has set a Sept. 30, 2021, deadline. If your loan is insured by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development; the Department of Agriculture; or the Department of Veterans Affairs (VA), the deadline for requesting an initial forbearance is also Sept. 30.

Your first step should always be to contact your loan servicer. You can check online to see if Freddie Mac or Fannie Mae owns your mortgage:

Remember, it's not loan forgiveness; it's loan forbearance. You and the servicer agree to temporarily reduce or suspend mortgage payments, and the servicer agrees not to foreclose during that time. You will still owe principal and interest on the payments you missed.

If your loan isn't owned or serviced by the federal government, ask your servicer about forbearance offers. In any event, if you're having difficulty making payments because of the pandemic, contact your servicer as soon as possible.

About 1.6 million mortgages are in pandemic-related forbearance, Black Knight, a mortgage data and technology company, told USA Today. Although that's down from pandemic highs, it's still a large number of troubled mortgages. Those who had to go into forbearance last year will soon have to start weighing their options.

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What happens next?

From a servicer's perspective, the ideal outcome would be that you hand the business a check for the missing payments when the forbearance period ends. This is unusual, particularly if you owe 18 months’ worth of mortgage payments.

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Typically, servicers offer a variety of repayment options, based on your ability to pay. They are in the business of servicing loans, not managing foreclosed real estate, and usually want to work with you. Here are the common options a lender may offer:

  • Repayment plan The servicer will ask if you can repay the amount you missed in forbearance in three to 12 months.
  • Back-end payment The servicer will ask if you can continue to make your mortgage payment as before. If so, the servicer will tack on the payments that were in forbearance as a lump sum at the end of your loan, typically without incurring interest. Eventually, you can refinance the mortgage or sell the home and repay your principal as well as the balance that was in forbearance.
  • Extended payments If you can make payments as you did before the global health crisis started, the lender may offer to extend your mortgage. This would mean additional interest and a longer payoff period, but as with the back-end payment, you could also refinance your loan or repay the balance when you sell the home.

A fourth option would be for the lender to offer a new mortgage with a 40-year term, which would reduce the amount of your monthly payments. The maximum length of a typical mortgage is 30 years. Some lenders already offer 40-year mortgages, but they are uncommon. A 40-year mortgage would increase the amount of interest you pay over the term of the loan. If you had a 30-year, $250,000 mortgage with a 3.125 percent interest rate and refinanced to a 40-year note at the same rate, you'd pay an additional $52,700 in interest over time.

If your forbearance period ends and you simply can't make any of these solutions work, you'll probably have to sell your residence. On the plus side, the strong housing market has given home values a lift. The S&P Case-Schiller U.S. National Home Price Index has jumped 16.6 percent the past 12 months, and even if you've been in your home a short time, you may get enough from the sale to turn a profit.

If you can't sell the loan for as much as you owe, you may be able to give the lender what's called a deed in lieu of foreclosure — in other words, you return the house to the servicer, to satisfy the debt. Typically, the servicer will require that the house be in good condition and broom-swept clean; some will even offer up to $3,000 in relocation costs. You may also be able to do a short sale, by which you sell your home on the open market for a price that's less than what you owe but acceptable to the servicer.

If you're in financial distress, talk with your loan servicer about your options. You may be able to find a mutually agreeable way to escape foreclosure and eviction — the worst-case scenario. Respond to any notices you get by phone or in writing. Coming out of forbearance can be a challenge, but don't make it tougher by ignoring the realities.

John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner's USA Today investing column ran in dozens of newspapers for 25 years.

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