Forebearance vs. Foreclosure: Why You Have Time No Matter What Congress Does

In the last month several people have reached out to ask what their options are should Congress fail to pass legislation that extends the bonus unemployment compensation, making them unable to continue making mortgage payments.

Whether you own a home or a duplex you either rent out or live in, the most important thing to remember is you have some time before you have to make life-altering decisions.

There are two “F” words most people associate with financial distress. If you’re not a real estate professional, it can be easy to mistake one for the other.

The most important of the two for most property owners to know right now is:

Forbearance. Forbearance is the temporary postponement or adjustment in the amount of a loan payment granted by the lender. This is often granted as the result of an unforseen disaster or health crisis. Monthly payments may be waived or adjusted for a specific amount of time. A common example of forbearance may be the lender tells the borrower they may pay make interest-only payments for a set length of time; usually six months.

At the end of the agreed-upon period, the lender may require the borrower to pay the entirety of the amount of the payments that were missed in one big chunk. Or, the lender may agree to extend the length of the loan by the number of months missed.

As a result of Covid-19, Congress passed the CARES Act which prevents lenders from requiring borrowers to pay the entirety of the money missed in one chunk. The good news is Congress has mandated lenders must tack these payments on to the end of the loan on all federally-backed mortgages. Most single-family and duplex loans qualify.

The CARES Act is set to expire on July 31. If you are facing challenges paying your mortgage, it may be wise to reach out to your lender before then to see if other arrangements can be made.

Foreclosure. Foreclosure is the process of the bank taking the property back. It is a process. Not an event.

If you miss three or more mortgage payments (whether during normal times, or the end of your forbearance period), the bank will likely be willing to try to work something out with you as long as you communicate with them. However, in Minnesota, they will schedule a sheriff’s sale after 6 months of missed payments.

At the sheriff’s sale, it’s likely the bank will ask bidders for the entirety of your loan amount. Whether there are no takers or an investor buys the property, with rare exceptions you will have 6 months to pay off the amount bid at the sale. At that point, the property becomes REO property, which stands for Real Estate Owned (by the bank).

Of course, all of that is also contingent upon how backlogged the court system is in the first place.

While it is hard to perceive anything these days as good news, the silver lining here is if you are facing financial duress, you have time for things to get sorted out.

Talk to your lender and see how they can help. And if something can’t be resolved, remember, odds are good you have equity in your property. You can always sell and get some cash to tide you over until this passes.

We are all in these challenging times together. Please let me know if there’s any way I can help.