Do I Qualify for Mortgage Forbearance?

Fannie Mae and Freddie Mac have made changes to their forbearance policies, for borrowers who are unemployed and can’t pay their home loans.  Fannie Mae’s policy was effective March 1, 2012 and Freddie Mac’s was effective February 1, 2012.

First what is mortgage forbearance?  The lender or mortgage servicing company will defer or reduce the monthly mortgage payments for a specific period of time, if the reason for the inability to pay is based upon job loss.  They will not have their home foreclosed on during that time.  After that time frame has passed, they will have to pay the former monthly payment, and also make up the difference that was on deferred.  The principal balance of the loan is not reduced.

For example: your monthly payments are $1,000 and are reduced to $0 for six months.  You found a job after 6 months.  You owe $6,000 in payments (6 months x $1,000).  You begin paying the $1,000 monthly payment plus an additional amount agreed upon each month.  If the amount is $250 a month, it will take 24 months to repay the $6,000.  For 24 months you pay $1,250 per month instead of $1,000.

Previously, loans secured by Fannie Mae or Freddie Mac required lenders and services to get their permission to reduce or suspend the payments.  Now the lenders don’t have to get permission to provide forbearance for six months due to unemployment.  An additional six months extension requires their permission.

How do you qualify?

The house must be your principal residence and not a second home or investment property.

The house has to be financed by Freddie Mac or Fannie Mae.

Financial hardship caused by job loss has to be documented and there must be a reasonable chance that without the forbearance, the borrower would not be able to pay and eventually lose the house.

Fannie Mae requires that monthly housing expenses must be more than 31 percent of monthly gross income, excluding unemployment benefits.

Borrowers can’t quality for an extension of the forbearance, if they have cash in bank accounts that exceed 12 months of monthly housing expenses.

This may be something to consider if you are unemployed. Hopefully you will be able to find a job within 6 to 12 months, so you can begin paying the loan again.   Unfortunately, it has taken many longer than six months to find another job. This is a much better alternative than foreclosure.

Credit Expert Witness, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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