If you have been financially impacted by the COVID-19 pandemic, you may be worried about how to pay your mortgage. The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a new federal law that enables two protections for homeowners with federally backed mortgages:
- A moratorium on foreclosures
- A right to forbearance for homeowners experiencing a financial hardship due to the coronavirus pandemic
In this post, we will focus on the second item listed above: mortgage forbearance. Keep reading to learn more about mortgage forbearance, along with the pros and cons to keep in mind when considering if this option is right for you.
WHAT IS MORTGAGE FORBEARANCE?
Mortgage forbearance is when your lender or mortgage servicer allows you to temporarily pause or reduce your payments for an agreed upon timeframe. This timeframe is called the forbearance period.
A forbearance is meant to help homeowners through a short-term financial hardship so they can get current on their payments and avoid foreclosure. It is not intended for people who have difficulty affording their mortgage in general.
It’s important to note that forbearance does not mean forgiveness. When a homeowner enters into a mortgage forbearance agreement, they are responsible for repaying any missed payments at the end of the forbearance period.
HOW DOES MORTGAGE FORBEARANCE WORK?
Depending on your situation and what your lender allows, your mortgage forbearance period can last for one month, several months, or even a year.
Under the CARES Act, homeowners with a federally backed mortgage (insured or guaranteed by Fannie Mae, Freddie Mac, VA, FHA or USDA) have a right to request a forbearance period up to 180 days, or approximately six months. This can be extended another 180 days if needed, for a total of almost 12 months.
While a mortgage is in forbearance, the loan servicer will not initiate a foreclosure on the home. In return, the homeowner repays the sum of all missed payments that accrued over the forbearance period in addition to making regular monthly mortgage payments.
PROS AND CONS OF MORTGAGE FORBEARANCE
Are you considering whether mortgage forbearance is right for you? Be sure to weigh the possible positive and negative outcomes of entering a mortgage forbearance agreement.
PROS OF MORTGAGE FORBEARANCE
- May allow you to avoid foreclosure and stay in your home.
- Provides time to address a short-term financial hardship.
- Less of a negative impact to your credit than foreclosure or a record of multiple late payments.
CONS OF MORTGAGE FORBEARANCE
- The unpaid payments will continue to accrue during the forbearance period and must be paid back.
- You will need to repay missed payments as a lump sum or may have a higher mortgage payment after the forbearance.
- Will not help you if you are having trouble paying your mortgage in general.
- In the past, consumers who have entered government established mortgage relief programs have sometimes been negatively impacted with credit and their ability to purchase or refinance new mortgages for a period of time.
MORTGAGE FORBEARANCE REPAYMENT OPTIONS
The specific repayment terms of a forbearance agreement will vary based on the lending institution who owns your mortgage loan. The most common options include:
- Lump Sum Repayment: Make a one-time payment for the amount due at the end of the forbearance period. For example, if you had a forbearance period of 90 days, or three months, you would owe all three months’ worth of mortgage payments at the end of that 90 days plus the amount now due for the fourth month.
- Increase Monthly Payments: Add an extra amount to your regular payments each month until the entire skipped amount is repaid. The amount of money required to be added to the payment is up to the loan servicer and could be substantial.
- Extend Mortgage Terms: The addition of the skipped months to the term of the mortgage.
HOW TO REQUEST MORTGAGE FORBEARANCE
You must contact your mortgage servicer or the financial institution that owns your mortgage loan in order to request this forbearance. If your loan is covered by the CARES Act, you have a right to request forbearance for up to 180 days, along with the right to request an extension for up to another 180 days. You are not required to submit additional documentation other than affirming a financial hardship caused by the COVID-19 emergency.
The decision to request mortgage forbearance should not be taken lightly. Remember, you will still have to make up the amount of any missed payments. As a general rule of thumb: If you can still afford your housing payment, you should continue to do so and avoid requesting to enter forbearance.
WHO OWNS MY MORTGAGE LOAN?
If you don’t know who owns your mortgage, there are different ways to find out:
- Call your mortgage servicer using the phone number from your latest mortgage statement.
- Use the Fannie Mae and Freddie Mac online loan lookup tools.
- Search the Mortgage Electronic Registration Systems (MERS) website.
GET YOUR FORBEARANCE AGREEMENT IN WRITING
Before you agree to a relief or forbearance program, ask your mortgage servicer to provide a written Forbearance Agreement to document and confirm the details of your arrangement. It’s important that you fully understand the details of this agreement before moving forward.
Remember, it is up to the loan servicer to set the rules for repayment of the missed payments. Make sure you know what your future obligation will be before agreeing to the forbearance.
FINAL THOUGHTS: IS MORTGAGE FORBEARANCE RIGHT FOR YOU?
Before finalizing a mortgage forbearance agreement, you should be sure that entering forbearance will actually benefit you long-term, rather than worsen your financial situation.
Here are three final things to consider when making your decision:
- What will the payment be once the forbearance period ends? Will it be manageable?
- How will your account be reported to credit bureaus during the forbearance period?
- Will your account accrue late fees?
If you’re having trouble making a decision, speak with a financial professional. You can contact your financial advisor or a HUD-approved housing counselor for assistance.
Our team is also available to help put you in touch with someone who can help. Contact us any time for assistance or questions about the mortgage process in general.