What Is Forbearance & How Is This Calculated for HAMP?
The Home Affordable Modification Program (HAMP) helps homeowners who are having difficulty making their mortgage payments, when the current mortgage payments comprise more than 31 percent of the homeowners' gross monthly incomes. The program modifies the loans to make them more affordable. Forbearance is one of several modification methods. It's appropriate for some homeowners who expect their hardships to be temporary.
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Forbearance
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Forbearance is a tool your lender may use to give you a chance to catch up on your payments. The lender agrees not to exercise its right to foreclose for a specified period. During that period, your payments will be suspended or reduced. At the end of the forbearance period, you'll either repay the amount in arrears in a number of payments added to your regular payment, or you'll repay the amount in arrears in one lump sum. Forbearance under HAMP lasts up to six months, and lenders only grant it if your inability to make your regularly payments is due to a temporary situation you expect to resolve before the end of the forbearance period.
HAMP Waterfall
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In most cases, loan servicers must offer HAMP alternatives in a specific order. The alternatives are designed to reduce the homeowner's mortgage payment to 31 percent of household income -- the percentage HAMP uses to define affordability. The servicer begins with the least drastic alternative and, if that fails to result in the target payment, works through increasingly drastic options until the target payment has been met. Your lender will consider forbearance after an interest rate reduction, and an extension of the loan term, but before forgiveness of part of the loan principal.
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Home Affordable Unemployment Program
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As of late 2011, you may be eligible for the Home Affordable Unemployment Program (UP) if your financial hardship is caused by unemployment. UP is a forbearance plan that reduces or suspends your payments for at least three months and for as many as 12, or until you're re-employed. You must be eligible for unemployment benefits to be considered, but you may not previously have received a UP forbearance or HAMP modification. The home in question must be your primary residence, and you must have obtained your mortgage on or before Jan. 1, 2009. You'll be considered for a HAMP modification following the forbearance period.
Forbearance Calculation
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When the lender requires that payments be made under a HAMP forbearance, it must limit the payments to 31 percent of the borrower's, co-borrower's and non-borrowing household members' combined gross -- pre-tax -- monthly income. All income is included, including wages and self-employment earnings, child support, alimony, pensions, disability, survivor benefits, rental income, unemployment payments and public assistance, as well as any other sources. Each amount must be documented and verified. Regardless of the effect of the forbearance on your loan payment, you'll have to continue making your standard escrow payments, such as property tax and homeowner's insurance. HAMP does not affect these obligations. If you're not currently paying into an escrow account, your lender may require that you begin. If so, it'll open an escrow account on your behalf.
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