A number of mortgage lenders allowed borrowers to enter into Forbearance Agreements during the COVID-19 Pandemic. A forbearance agreement allows a borrower to miss mortgage payments for a period of months. The forbearance period may be 3 months or as much as a year.
The forbearance period has now ended for many borrowers. When the forbearance period ends borrowers must make up the missed payments. The following are some of the options available to borrowers to make up the missed payments.
Deferral
The payment of principal, interest, and escrow advances are delayed until the end of the loan term (unless the property is sold or refinanced in the interim). The payment at the end of the loan term is a balloon payment.
The deferred amount does not accrue interest, and late fees may not be added to the it. However, the borrower must be able to resume the normal monthly payments.
Partial Claim
A partial claim is a noninterest-bearing loan for the deferred amount which creates a lien subordinate to the primary mortgage. The partial claim is due and payable when the primary mortgage is paid in full or the property is sold.
The borrower, however, must have a FHA or VA loan for the partial claim to be an option.
Stream-lined Loan Modification
This option lowers the monthly principal and interest payment by extending the term of the loan and/or reducing the interest rate. The borrower does not have to complete a loan modification application, provide documents, or complete a trial payment plan; thus, it is stream-lined. This type of loan modification often lowers the monthly payment by about 20%. The borrower, however, may be required to be current on payments prior to the COVID-19 Pandemic for this option to be available.
Also, this option may not be the most desirable depending on the circumstances of the borrower. For instance, if the borrower only has a few years left on the mortgage loan, then she likely does not want to extend it by 30 to 40 years.
Conclusion
Lenders ordinarily reach out to borrowers before the forbearance period ends to discuss payment options. Borrowers may have options other than those discussed above depending on the lender and the type of loan. In the event the borrower cannot cure the deferred amount by using one of the options agreeable to the lender, a Chapter 13 Bankruptcy may be used to cure the delinquent payments over a period of time.