Which loan covers the period of time between the end of one mortgage and the beginning of another?

What Is a Mortgage Forbearance Agreement?

A mortgage forbearance agreement is an agreement made between a mortgage lender and a delinquent borrower. In this agreement, a lender agrees not to exercise its legal right to foreclose on a mortgage, and the borrower agrees to a mortgage plan that will—over a certain time period—bring the borrower current on their payments.

The coronavirus outbreak triggered forbearance help beginning March 18, 2020. Legislation and policies in the wake of the 2020 economic crisis have sought to offer relief to homeowners struggling to make mortgage payments since then.

Key Takeaways

• A mortgage forbearance agreement is a plan made between a lender and a borrower who is struggling to make mortgage payments that attempts to allow the borrower to fulfill the mortgage obligation and avoid foreclosure.
• The agreement generally reduces or entirely suspends mortgage payments for a set time period during which the lender agrees not to foreclose on the property.
• It is intended for borrowers with temporary financial problems and is not considered a long-term solution.
• In some cases, a lender may agree to extend a mortgage forbearance agreement beyond its initial end date.

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How a Mortgage Forbearance Agreement Works

A mortgage forbearance agreement is made when a borrower has a difficult time meeting their payments. With the agreement, the lender agrees to reduce—or even suspend entirely—mortgage payments for a certain period of time. They also agree not to initiate a foreclosure during the forbearance period.

The borrower must resume the full payment at the end of the period, plus pay an additional amount to get current on the missed payments, including principal, interest, taxes, and insurance. The terms of the agreement will vary among lenders and situations. With a regular forbearance agreement, even though payments may be suspended for a while, interest continues to accrue.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD). 

A mortgage forbearance agreement is not a long-term solution for delinquent borrowers. Rather, it is designed for borrowers who have temporary financial problems caused by unforeseen problems, such as temporary unemployment or health issues. Borrowers with more-fundamental financial problems—such as having chosen an adjustable-rate mortgage on which the interest rate has reset to a level that makes the monthly payments unaffordable—must usually seek other remedies.

A forbearance agreement may allow a borrower to avoid foreclosure until their financial situation gets better. In some cases, the lender may be able to extend the forbearance period if the borrower’s hardship is not resolved by the original agreed-upon end date.

A loan modification is meant to be a permanent solution to unaffordable monthly mortgage payments through renegotiation of the mortgage terms rather than the temporary suspension or reduction of payments.

Mortgage Forbearance Agreement vs. Loan Modification

While a mortgage forbearance agreement provides short-term relief for borrowers, a loan modification agreement is a permanent solution to unaffordable monthly payments. With a loan modification, the lender can work with the borrower to do a few things such as—reduce the interest rate, convert from a variable interest rate to a fixed interest rate, or extend the length of the loan term—in order to reduce the borrower’s monthly payments.

In order to be eligible for a loan modification, borrowers must show that they cannot make the current mortgage payments because of financial hardship, demonstrate that they can afford the new payment amount by completing a trial period and provide all required documentation to the lender. The documentation the lender requires varies by lender, but it may include a financial statement, proof of income, tax returns, bank statements, and a hardship statement.

Legislation related to the 2020 economic crisis provides special mortgage forbearance help to homeowners with federally-backed home loans, including loans backed by Fannie Mae, Freddie Mac, FHA/HUD, VA, and USDA.

Mortgage Forbearance Agreements and COVID-19

Legislation related to the 2020 economic crisis offers special mortgage forbearance help for homeowners with federally-backed home loans. This includes HUD/FHA, VA, USDA, Fannie Mae, and Freddie Mac mortgages. To be eligible for COVID-19 mortgage forbearance, you must have experienced financial hardship directly or indirectly due to the coronavirus pandemic.

Although private mortgages that are not federally backed are not covered by the legislation, private loan servicers may offer similar forbearance options. If you struggle to make mortgage payments, know that all loan servicers are generally required to discuss payment options with you, even if your loan is not federally backed.

Eligibility

You are eligible for COVID-19 mortgage forbearance if you have an HUD/FHA, VA, USDA, Fannie Mae, or Freddie Mac mortgage AND you experience financial hardship directly or indirectly due to the coronavirus pandemic. No proof of hardship is required.

Deadline to Apply

For a HUD/FHA, USDA, or VA loan, the deadline to apply for an initial forbearance was June 30, 2021, though the White House announced at the end of July that the enrollment period would be extended to Sept. 30, 2021. If your mortgage loan is backed by Fannie Mae or Freddie Mac, there is currently no deadline to request an initial forbearance.

Since private loans are not covered by COVID legislation, private mortgage COVID-19 loan forbearance is whatever you can negotiate with your lender. Therefore, the application deadline, if one exists, is up to the mortgage servicer.

The deadline to apply is for "initial forbearance" (typically 3 to 6 months). Once you have applied and been granted forbearance, you can extend for up to one year.

Length of Forbearance

Since COVID-19 forbearance is regulated, it has a specific time length. Most initial forbearance agreements are scheduled to last 3 to 6 months with renewal up to 12 months. In certain cases, depending on when you began your initial forbearance your total can be as much as 18 months.

• If your mortgage is backed by Fannie Mae or Freddie Mac AND you were in an active forbearance plan as of Feb. 28, 2021, you can request up to 18 months' total forbearance.
• If your mortgage is backed by HUD/FHA, USDA, or VA, and your initial forbearance was in effect on or before June 30, 2020, you can request up to 18 months' total forbearance on that loan as well.

Other Provisions of COVID-19 Mortgage Forbearance

COVID-19 mortgage forbearance agreements also include specific non-negotiable provisions that may or may not be found in regular mortgage forbearance agreements.

• Payments can be deferred or reduced.
• Interest accrues but is not capitalized.
• No additional fees or penalties will be levied.

Homeowner Assistance Fund

Passage of the American Rescue Plan Act of 2021 included the nearly $10 billion Homeowner Assistance Fund, designed to be disbursed to states and used to provide help to homeowners in danger of foreclosure or eviction.

Funds will also be used to help homeowners avoid delinquencies, defaults, loss of utilities, or home energy services, or otherwise experiencing financial hardship related to mortgages and housing.

When Forbearance Ends

At the end of COVID-19 mortgage forbearance, your repayment options vary depending on the agency. One, across-the-board stipulation, is the prohibition against requiring borrowers to repay the deferred amount in a lump sum.

Typical repayment options include the following. Not all borrowers will be eligible for all options.

• Repayment - A portion of the amount you owe will be added to your regular payment.
• Deferral/partial claim - Your missed payments will be moved to the end of your mortgage or placed in a lien that will be paid off when you refinance, sell, or terminate your mortgage.
• Modification - Your payment will be lowered and the amount you owe added to the loan. It will take longer to pay off your loan.
• Lump-sum - You cannot be required to accept this option which would involve paying off the entire delinquent amount in one payment.

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