Remember that mortgage lenders are generally willing to work with homeowners to find a solution to avoid foreclosure if a feasible repayment plan can be worked out. In a forbearance, the lender agrees to temporarily cut or suspend mortgage payments until the homeowner can start paying a full mortgage payment again plus making up the missed payments.

A forbearance is typically only a viable option if you can show certain types of hardships that your lender approves of and that your income is expected to return to normal in less than 6 months, on average. Remember, a forbearance won’t help you if you’re have purchased a home that you can’t afford. In my experience, managing a forbearance is only possible if your regular payment amount is less than 30% of your monthly take home pay. Since loans are often made for more than this it may not be possible for a forbearance plan to work for you. In that case, you should pursue different options.

In order to grant a mortgage forbearance, mortgage lenders want to see that the delinquency was caused by an unexpected financial circumstance such as illness or injury. Some will accept a job loss as long as it’s a temporary situation. Surprisingly, few lenders will accept natural disasters such as a fire, flood or storm damage as a reason for a forbearance. The reason for this is that the property isn’t inhabitable and this increases the chance that the homeowner won’t continue to make payments. Beyond just the reason, the mortgage lender has to be assured that the borrower has a sound and reasonable plan to return to fiscal stability and can be relied upon to stay current on their mortgage payments afterward.

To begin a mortgage forbearance you should get in contact with the lender’s loss mitigation department. A customer service flunky or a collections agent won’t be able to help you with this. It is important that you take complete and careful notes about your interaction with this department. Stay polite and calm while you speak to them and in any written communication with them. It’s best to begin by asking for a homeowner’s assistance package or a forbearance agreement application. Sometimes the lender’s representative will ask you for details on your situation in writing although some will take a statement over the phone.

In general, most lenders will be willing to enter into a forbearance agreement if there are 3 or fewer delinquent payments on the the account. If  there are more, it is quite rare for them to negotiate an agreement. If you aren’t behind on your mortgage, then it is unlikely that they will be willing to negotiate an agreement with you until you are actually behind on payments.

A forbearance agreement generally calls for the borrower to pay back the loan delinquency within 3 to 12 months, usually by making an extra 1/2 payment each month including interest and late payment fees. Sometimes lenders will remove late payment fees but sometimes not, however, it doesn’t hurt to ask about this. Occasionally, they will tack on an inspection or appraisal fee. They will do this to insure that you’re still occupying the home and that the property hasn’t been abandoned. Lenders generally prefer a gradual repayment plan instead of a lump sum payment although some may accept this if the source of the funds can be verified. It is almost unheard of for a lender to extend the pay back time for more than 12 months so make sure any proposed repayment plan fits well within this timeframe.

Make sure that you carefully read any forbearance agreement you receive from the lender. If you’re unsure about any part of it, consult with the lender and with an attorney. Some lenders will try to sneak in additional terms and conditions that may cause you difficulty.

It is important not to abandon the property while you’re working under a forbearance agreement. Not only does this indicate to the lender that you’re likely to default on the loan, it may also disqualify you from tax advantages as well as government programs intended to help distressed homeowners.

Of course, a forbearance agreement will only work if you’re on solid financial ground where you will be able to overcome a temporary financial setback. If this isn’t true in your case you should examine other options that are more drastic than a forebearance.

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A few years ago, this kind of insurance policy wasn’t common, simply because there wasn’t much demand. Unemployment in previous economic downturns wasn’t as severe and didn’t affect as many areas of the economy. However, with unemployment up and forecasted to stay up in the 10% range for at least 3 to 7 years, many people want the peace of mind job loss mortgage insurance can bring. On the other side of the equation, home builders and real estate agents find such policies to help close a deal since it takes care of one of the biggest objections today’s home buyers have, job security.

As you might expect, job loss insurance policies vary from state to state and company to company. Most policies are of limited duration, typically around two years after the purchase of a home. Most also have pay out limits of around $1500-$1800 a month for up to 6 payments total during the term of the insurance.

As with any insurance policy the devil is in the details. Therefore it is essential that you carefully read and study any job loss insurance policy you purchase or that is purchased for you by the seller.

First of all, don’t assume that the policy will make your full mortgage payment. Most policies only pay out enough to keep a home out of foreclosure but may leave an underfunded escrow for private mortgage insurance, home owner insurance and taxes. Make sure you know what the policy will and want pay for. And, you need to know that this payment is considered taxable unemployment income by the IRS, so you’ll need to be prepared for the tax consequences.

Next, be aware of the effective date. Many policies delay the effective date for 2-6 months after closing to prevent people from using them to purchase a home when they know that a job loss for them is looming.

Don’t be lulled into a false sense of security by these policies. Many pay out slowly and you may end up with one or more late payment dings on your credit report. You have to be diligent and make certain that the insurer pays the mortgage holder in a timely fashion.

Lastly, there are exclusions written into job loss insurance policies that may prevent you from taking advantage of their benefits. Naturally, people who’re already unemployed can’t be covered nor can people who’re not of legal age or who’re about to retire or already retired. Plans may have other exclusions so make sure you know which ones might apply to you.

Typically self-employed people are excluded, sometimes even if the self-employment is a part-time side business and not the primary source of income. Also, plans generally state that the unemployment must be involuntary. This covers a wide range of incidents beyond just quitting a job ranging from illness to strikes. Make sure you understand these work related exclusions clearly to avoid any surprises.

Of course, I recommend that you self-fund such an insurance policy for yourself by having an emergency fund of 3 to 6 months expenses tucked away beyond having a substantial down payment before purchasing a home. I also recommend not purchasing a home where your monthly mortgage payment is more than 25% of your take home pay. However, if you do purchase a home without these safeguards in place a job loss mortgage insurance policy can help mitigate some, but not all, of your risks.

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