Forbearance is a temporary postponement of mortgage payments. The lender can grant this option to a borrower instead of forcing the property into foreclosure. The CARES Act provides protections for homeowners with mortgages that are federally or Government Sponsored Enterprise backed or funded such as FHA, VA, USDA, Fannie Mae and Freddie Mac.
A mortgage holder should contact the lender to explain the temporary difficulty they are having making payments and ask for relief under forbearance or other options. Once the lender grants approval, it is important for the borrower to get the terms of the forbearance agreement in writing to be clear about when the payments will resume and how the missed payments will be recovered.
Generally speaking, homeowners in a forbearance plan will not incur late fees and it should not adversely affect their credit. Unfortunately, borrowers must be vigilant to see that the lender is protecting them from delinquent credit marks according to their agreement.
Forbearance is easy to receive but not so easy to recover from. Free credit reports can be obtained on a weekly basis until April 21, 2021 at www.AnnualCreditReport.com. Reports are available from Experian, Equifax and TransUnion. This will allow borrowers to monitor whether the lender has inadvertently reported items inaccurately.
Prior to the end of the forbearance period, borrowers should contact their loan servicer, the company that accepts their payments. Review the terms of the forbearance plan and expectations for repayment. Verify the unpaid balance and that there are not any payments marked as late or delinquent during the forbearance period.
One more item to discuss with the loan servicer is the payment of the property taxes and insurance. Since multiple mortgage payments may have been missed and most payments include 1/12 of the annual amounts for these items, there may not be enough to pay for them when they become due.
Since it is estimated that there are over four million borrowers in forbearance currently, it may be difficult to talk to the servicer but starting the process early and being persistent will be helpful.
At the end of forbearance, the borrower needs to resume regular payments and establish a plan with the lender to repay the missed payments. The terms are negotiated between the borrower and the lender.
One way is through a loan modification which can restructure the loan. In some cases, it would add the missed payments to the loan balance and recalculate the payments for the remainder of the term.
A borrower could pay the forbearance money in cash but the practicality of that is not realistic. If the person couldn’t make the payments during forbearance, they probably don’t have the liquidity to pay them afterward. This option is entirely at the buyer’s election.
Forbearance is a temporary way to postpone the mortgage payments with the understanding that you will be able to resume repaying the loan. If the circumstances that caused the issue initially become permanent, then, other remedies must be considered. If there is equity in the property, selling the home may be the way to materialize it for the homeowner.
Please contact us at (503) 851-1645 if you need to know what your home is worth and how long it would take to sell it. We’re happy to provide this information as a service without obligation so you can be aware of your options.
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During the mortgage meltdown that caused the Great Recession a decade ago, some homeowners lost their homes to foreclosure or constructed a short sale to get out from under the debt. In most of the cases, the lenders forgave all or part of the debt owed them.
Similarly, in the early 90’s after the failure of the Savings & Loans in the U.S., thousands of homeowners lost their homes in the same way but back then, the policy of the IRS was to consider the forgiven debt as income. Today, it is still considered income which means that a homeowner could lose their home because they could not afford to pay for it and to make matters worse, they would owe income tax on the debt relieved.
The good news is that in 2007, Congress passed the Mortgage Forgiveness Act and it has continued to be extended with its current expiration of 12/31/20.
The amount forgiven for income tax purposes may not be the same amount owed to the lender. Mortgage forgiveness has a limited exclusion for discharged home mortgage debt for a principal residence only; it does not include second homes or investment properties. Only the amount of mortgage debt that can be treated as acquisition indebtedness in included.
In the example below, a homeowner purchased a home and refinanced the home five years later at 80% of the market value. The new loan proceeds were used to payoff the original mortgage and make $30,000 of new capital improvements. The revised acquisition debt is the acquisition debt at the time of refinance plus the capital improvements made with the loan proceeds.
The new $400,000 loan produced $39,417 of home equity debt which is not considered acquisition debt. Home equity debt is money borrowed on a home and can be used for any purpose, but it may not be tax deductible or considered acquisition debt. Acquisition debt is money borrowed to buy, build or improve a principal residence subject to a $750,000 limit.
Assume that the borrower never made a payment on the new loan. If the new loan went through foreclosure while the Mortgage Forgiveness Relief Act is in effect, the forgiveness would be limited to the acquisition debt of $360,583 and the remaining amount of $39,417 would be considered income and subject to tax.
This article is meant to inform homeowners of liabilities associated with foreclosures and possible remedies that may be available. This example is meant to illustrate the portion of a loan that could be forgiven. Taxpayers should always consult their tax professional regarding their specific situation and the way the law would apply to their situation. For more information, see IRS Publication 4681.
|Purchase Price … 5 years ago|
|Mortgage at time of purchase … Acquisition Debt|
|Fair Market Value … Today, 5 years later|
|Refinanced 80% – Loan to Value|
|Replaced unpaid balance – current acquisition debt|
|Capital improvements made with loan proceeds|
|Revised acquisition debt|
|Home equity debt … difference in refinanced amount and acquisition debt|
If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services. 1008 12th St. SE Salem, OR 97302 503-851-1645
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