In the first few weeks of the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (or CARES) Act. One provision of the CARES Act provides mortgage relief by permitting homeowners forbearance of mortgage payments backed by Fannie Mae and Freddie Mac, for a period of up to 180 days, followed by a potential extension for up to another 180 days. Homeowners must contact their loan servicer to request forbearance.
For homeowners facing financial hardship due to the coronavirus pandemic, the forbearance option sounds like a welcome option. However, it’s important to distinguish forbearance from forgiveness. Under a forbearance, your lender allows you to pause, or reduce, your mortgage payments for a period of time. Yet, forbearance does not mean that your payments are forgiven or erased; you are still required to repay any missed or reduced payments in the future.
What initially sounded like good news for homeowners has turned into ambiguity and uncertainty, and in some cases, negative consequences. We at the Tim Pierson Home Sales Team advise strong caution before choosing to pursue a mortgage forbearance under the Act. Below are two of the pitfalls we have seen over the last few weeks.
What Happens When the Forbearance Ends?
Different mortgage companies are approaching in different ways what happens after the forbearance ends. You need to very carefully review the terms your bank offers for repayment, so you are not caught unaware. In some situations, we have seen homeowners accept forbearance terms that have set them up for prolonged pain later. Below are just a few of the possible repayment options we are hearing from banks:
- Balloon payment – after the end of the forbearance period, some banks are requiring that the full amount of the missed mortgage payments be paid in full! Obviously that balloon payment can create a lot of pain homeowners finding it difficult to make even one month’s payment. If your mortgage payment is normally $2,500/mo, when the bill comes due, you may have to make a balloon payment of $30,000 if you take the extended 12-month forbearance.
- Restructured loan terms – once the forbearance period ends, some banks may increase the monthly payment over the remaining term to recoup the missed payments, or they may simply tack another year onto the term. So, your 30 year mortgage is now 31 years? Interest is likely still accruing during the forbearance period, so you’ll end up paying more in the long run.
- Reduced payments – when repayments begin, the amount of the monthly payment is reduced by a certain percentage, and the homeowner has a set number of months to repay. For example, if your payment is $2500/mo, the missed payments may be reduced to $1250, but you would need to pay back all the missed payments within specified period of time, while also keeping up with your regular monthly payments.
These are just a few of the ways that banks are dealing with the end-of-forbearance repayment. Each bank is different, and there are many variations.
Will a forbearance Affect My Credit?
It is critical that you begin any forbearance application process BEFORE you miss your first payment. Even though the CARES Act requires lenders report homeowners in forbearance as “current” on their mortgages to the credit reporting companies, if you are already behind on your mortgage before you ask for forbearance, your bank may continue to report you as delinquent.
Communicating with your bank early and often is the best way to ensure a positive outcome. However, continue to monitor your credit to ensure that your bank is reporting your forbearance properly. You want to avoid any error in reporting to impact your future ability to get a mortgage or get approved for credit.
Before you accept any forbearance on your mortgage, make sure you understand completely:
- What will be required from you when the forbearance ends
- How your credit file will be affected
Our advice to homeowners is: your best option is to continue to pay your mortgage if you can. Hopefully, with the extended unemployment benefits and the other tax incentives, you will have enough cash flow to maintain our mortgage without forbearance. You may be able to get extensions or help with your other bills (utilities, car payments, etc.) that will make it possible to put money toward our mortgage. If you do find yourself in the situation where you need to consider forbearance, make sure you have all the details and know what to expect when the forbearance ends. If you know in advance what to expect, you can be setting money aside as you can in order to ensure you can meet the obligation and keep your home.
We are here to help you, in the best of times and in times of uncertainty! If we can help you navigate through the mortgage forbearance issue, or any other issue, please do not hesitate to contact us at firstname.lastname@example.org or phone us at 202.800.0800.