Ed DeMarco, president of the Housing Policy Council (HPC) says, “Forbearance is a normal tool in the toolkit, it’s been used with some regularity with natural disasters, or any temporary emergency which disrupts normal living and income.”
This past July, close to 8.5 percent of all active mortgages were in forbearance, however, the number has come down slightly since then. While the mortgage forbearance program under the CARES Act technically applies only to loans backed by Fannie Mae and Freddie Mac, or issued FHA and VA loans, many private lenders have extended forbearance protections voluntarily.
For many borrowers who are already facing financial problems they didn’t expect or plan for, going into forbearance might cause some heartache. However, this may be the lifeline needed in these situations. Understanding the basic facts of the forbearance process might help alleviate some of the anxiety. Therefore, we will explain the common questions borrowers have.
What is mortgage forbearance?
Mortgage forbearance allows homeowners to pause or lessen their mortgage payments when in a short-term crisis. During this coronavirus pandemic, most lenders are not requiring proof of hardship outside of verbal or written verification from the borrower requesting the forbearance.
Your forbearance options might differ depending on whether you have a privately-owned mortgage or a government-backed mortgage. It’s best to find out from your lender which type of loan you have and what the terms are before you apply for forbearance.
You MUST talk to your lender about going into forbearance before you stop making payments because even if you qualify, the protection will not automatically be granted. Therefore, first apply for forbearance and continue making payments on your loan until you have officially been granted the protection in order to avoid any delinquency or seriously negative impact on your credit score.
What does forbearance mean under the CARES Act?
The CARES Act is what the federal government provided as a relief response to the economic downfall caused by the coronavirus pandemic. The trillion-dollar relief package intended to help homeowners with government-backed mortgages, of which nearly three quarters of mortgages in the U.S. account for. These home loans include the Fannie Mae and Freddie Mac owned as well as VA, USDA and FHA mortgages.
Borrowers facing economic hardship in this time, can get mortgage forbearance for up to a year under the CARES Act. During this COVID-19 pandemic, lenders cannot foreclose on your property and there are several repayment options available to homeowners once the forbearance period ends. Some of these options are explained here.
Additionally, according to Freddie Mac, there’s currently no deadline to request forbearance under the CARES Act. Once the request is made, it can be granted a deferment for a maximum of 180 days with an extension option for another 180 days.
What happens if you’re not protected under the CARES Act?
Although borrowers with privately-owned mortgages are not covered under the CARES Act, many lenders are offering forbearance and loan modification options for these borrowers. So regardless of who owns your loan, be sure to talk to your lender if you’re struggling to pay your mortgage. To simply stop paying the bill would be detrimental to your credit.
Can people go from a private mortgage to a government-backed mortgage?
Mortgage refinancing is the only way to get out of your current mortgage besides paying off the full remaining balance – which may not be possible.
Does mortgage forbearance hurt your credit?
The best part of mortgage forbearance is that it will not show up on your credit report as negative activity. You will be reported as being current on your loan even though you’re no longer making payments. This is why it is imperative that you be in touch with your lender prior to going into forbearance as stopping payments without official forbearance protection from the lender will seriously damage your credit.
Do borrowers pay extra interest if they get a forbearance?
Typically, borrowers will not have to pay additional interest on their mortgage in forbearance. The interest rate and amount of interest stays in accordance to the borrower’s contract.
Tom Goyda, senior vice president, consumer lending communications at Wells Fargo explains: “During a forbearance plan, interest is not paid but still accrues in accordance with the terms of the note. Additionally, as required by the CARES Act, no interest accrues during the forbearance period beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the note.”
Andrew Demers, partner at Weiss Serota Helfman Cole & Bierman in Boca Raton, Florida, who specializes in banking and real estate law adds that the only exception in which the loan interest might change is if the lender extends the loan maturity date or increases the loan interest rate. Demers presses how it is critical that borrowers understand the payment terms of the forbearance and ask the following few key questions:
- Is this a complete payment deferral or do I have to pay interest or escrow advances during this time?
- Is there an extension being added on to the loan maturity date?
- Is the lender planning to recapture the deferred through a balloon payment at loan maturity, an extended maturity date, or some other catch-up method?
“Technically speaking, a deferment agreement is a modification and amendment to the loan documents,” says Demers. “ Such requires a clear understanding of the parties’ respective rights and obligations.”
When the forbearance plan is complete, a repayment plan, which will determine how the interest is handled will be provided by the lender.
Susan Atran, spokesperson for Bank of America, says, “Interest accrues during the forbearance, but it doesn’t have to be repaid until later. At the end of the forbearance, the delayed payments and interest accrued can be paid in full by the client, resolved through an extended repayment plan or the loan may be modified, depending on the client’s needs.”
Can you refinance your mortgage during forbearance?
Can you sell your home during forbearance?
Yes, homeowners can. The foreborn amount in forbearance would become payable upon sale of the property.
Are rental properties or second homes eligible for forbearance?
GSE-backed mortgage securities, in other words, property owned by Fannie Mae or Freddie Mac, are indeed eligible for forbearance if they’re used as rental properties or second homes. FHA, VA or USDA loans alternatively, cannot be put into forbearance if the property is used as rental property or second home.
Can you get a forbearance if you have a home equity loan or HELOC?
Some banks, like Wells Fargo, do offer forbearance to home equity customers. But it is best to ask the lender that holds your loan whether it can be put into forbearance.
Goyda remarked on this situation saying, “At the end of the initial three-month payment suspension, Wells Fargo has a number of potential options available for mortgage and home equity customers. Depending on the loan investor and other factors, those options could include a continuation of the payment suspension, moving the missed payments to end of the loan or a modification to address longer-term financial changes that may impact their ability to keep up with their monthly payments. We’ll need to talk with them directly to understand their circumstances and identify the best way to help them going forward.”
The best thing to do is talk to your lender about your mortgage relief options if your finances were hit by COVID-19. Remember that a mortgage forbearance is not automatic, so do not stop making payments until official forbearance protection has been authorized. Without talking to your lender of your situation, you can end up in default and your credit report will suffer.