Basically, a mortgage forbearance is designed to allow a reduction of payments or a delay in making payments over a short time period, generally less than 6 months. Up until the recent housing crunch, lenders would make such agreements in response to a borrower’s temporary financial setback, such as a job loss or serious illness or injury. The deal usually required the homeowner to catch up on any reduced or missed payments within 6 months to a year.
Under the expansion of the Home Affordable Modification Plan (HAMP), mortgage lenders who’re participating in the program will be required to offer a forbearance plan to borrowers who’re unemployed. These plans are required to be for at least 3 months duration and may be up to six months under certain circumstances. Payments, if there are any under the plan, have to be reduced to 31% or less of the borrower’s gross income.
For a homeowner to be eligible under the HAMP plan they must first meet the typical program standards which are owner occupancy, a loan balance of less than $729,750 and a loan origination date prior to January 1, 2009. Beyond this, the mortgage, while it can be current, can’t be more than 90 days overdue. Proof of receiving unemployment benefits is another requirement. Additionally, a borrower must request the forbearance, it can’t just be given automatically.
As part of the program, should the unemployed homeowner find work during the forbearance period and their regular mortgage payment would exceed 31% of their gross income, the borrower has to be given the opportunity to seek a permanent loan modification. The idea here is to move the troubled homeowner from the temporary payment reduction to a permanent principle reduction under HAMP. The Obama administration is offering lenders incentives to do this kind of loan forgiveness but banks have been slow to implement this costly plan.
Should the homeowner not qualify for a loan modification under the Home Affordable Modification Plan they are expected to fulfill their obligations under their mortgage loan. This means to pay back the difference between any reduced payments and the full payment, typically rather quickly.
If the homeowner remains unemployed or otherwise unable to make mortgage payments at the end of the forbearance period then other foreclosure alternatives would be considered such as a short sale or deed in lieu of foreclosure.
Should you wish to participate in a Home Affordable Modification Plan approved mortgage forbearance make sure that such a plan will work for you and won’t just serve as a way to postpone foreclosure and get you in a deeper hole financially.