There is now an additional benefit for homeowners with FHA financing. HUD has implemented a program that allows unemployed borrowers to remain in their homes for an extended period of time without having to make a mortgage payment.
The FHA has always taken exceptional steps to assist borrowers who have become delinquent in their loan payments. For example, borrowers who have fallen behind in payments are urged to contact a HUD approved housing counselor. There are a variety of programs available to help delinquent homeowners. The HUD housing counselor can provide specific guidance to each delinquent homeowner on the best course of action to take.
Commencing in August, the FHA will make changes to its Special Forbearance Program. Loan servicers will be required to extend a 12 month forbearance period to all unemployed homeowners. The current guidelines allow only a 4 month forbearance period, but were extended due to the fact that 45% of the unemployed have been out of work for over six months.
Under a mortgage forbearance, the lender agrees to suspend the legal right to foreclosure for a specific period of time. In turn, the borrower agrees to bring the mortgage payments current under a structured repayment plan. The past due payments are typically added to the mortgage balance and are paid off once the borrower begins to make payments again. Lenders have generally agreed to forbearance plans when the borrower could not make payments due to short term problems that were expected to be cured relatively soon.
Under the new guidelines, the FHA’s Special Forbearance Program gives borrowers up to a year to find employment without having to worry about making a mortgage payment. After the one year payment holiday, the FHA reviews the borrower’s financial condition to determine what future course of action to take.
Whether or not the expanded assistance by the FHA will prevent borrowers from losing their homes remains to be seen. Anyone out of work for a year is likely to fall behind on other debt obligations. After an extended period of unemployment, it will be difficult for borrowers to resume making mortgage payments if savings have been depleted and other payments are in arrears. If the borrower eventually finds a new job, but at lower pay, the borrower may quickly wind up in default again.
Ultimately, the biggest benefit of the FHA Forbearance Plan could result from buying time and living in the home for an extended period of time with zero mortgage payments. Most FHA homeowners have negative equity due to the very small down payment made when the home was purchased. In addition, as home prices continue to spiral downward, negative equity continues to increase.
If making the payment is difficult and the mortgage balance is substantially larger than the value of the home, the smartest financial choice for many homeowners will be a strategic default. The FHA Forbearance Plan will stop the foreclosure clock for a year. Once the foreclosure process actually begins, it could take years to complete. Homeowners who chose to strategically default could wind up living in the home, payment free, for many years before they are finally evicted (see You Walk Away – Intelligent Strategic Default).
The FHA Forbearance Plan may wind up benefiting FHA borrowers in a way the FHA never contemplated.