Ins and outs of mortgage forbearance Everything you should know about delaying payments
More than 3.4 million Americans are in mortgage forbearance plans, which allows them to pause payments for a month to as long as a year. As the coronavirus pandemic continues to jolt the economy, more people will face financial difficulty, including how to pay their monthly mortgage bill.
“The forbearance program is obviously designed to deal with the characteristics of this pandemic. This isn’t related to mortgage underwriting or a downturn in the economy — it’s a sudden disruption that’s believed to be temporary in which people can resume their normal life,” says Ed DeMarco, president of the Housing Policy Council.
Some 6.4% of all active mortgages are in forbearance. So far, the total amount of unpaid principal due to forbearance is $754 billion, according to Black Knight. This includes 5.6% of loans backed by Fannie Mae and Freddie Mac and 8.9% of all FHA and VA loans.
Going into forbearance might be worrisome for many borrowers who are facing financial problems they didn’t expect or plan for. Understanding the basic facts might help alleviate some of the worry. Here we’ll cover essential forbearance questions borrowers have.
What is a mortgage forbearance?
Mortgage forbearance allows homeowners to pause their mortgage payments while dealing with a short-term crisis. In the case of coronavirus-related forbearance requests, most lenders are not requiring proof of hardship outside of verbal or written verification from the borrower.
Depending on whether you have a governmentbacked or privately owned mortgage, your forbearance options might differ. Before you apply for forbearance, find out from your lender which type of loan you have.
What does forbearance mean under the CARES Act?
The CARES Act is the federal government’s relief response to the economic blow delivered by the coronavirus pandemic. The trillion-dollar relief package includes help for homeowners with governmentbacked mortgages, which make up about 3 out of 4 mortgages in this country. That includes home loans owned by Fannie Mae and Freddie Mac as well as VA, USDA and FHA mortgages.
Under the CARES Act, borrowers facing economic hardship because of COVID-19 can get mortgage forbearance for up to a year. During this time, lenders cannot foreclose on your property. There are several repayment options available to homeowners once the forbearance ends.
What happens if you’re not protected under the CARES Act?
Borrowers with privately owned mortgages are not covered under the CARES Act. Nevertheless, most lenders are offering forbearance and loan modification options for borrowers with privately owned mortgages.
“The congressional mandate and CARES Act only covers loans owned by the government; loans that don’t meet those qualifiers aren’t guaranteed forbearance. However, the forbearance takeup rates for nonfederally backed loans is pretty meaningful,” DeMarco says.
Regardless of who owns your loan, be sure to talk to your lender if you’re having trouble paying your mortgage. The worst thing you can do for your credit is to simply stop paying the bill.
Will mortgage forbearance hurt your credit?
No, mortgage forbearance does not appear on your credit report as a negative activity.
Do borrowers pay extra interest if they get a forbearance?
Borrowers typically won’t have to pay additional interest on their mortgage in forbearance. The amount of interest and interest rate stays the same according to the borrower’s contract.
“During a forbearance plan, interest is not paid but still accrues in accordance with the terms of the note,” says Tom Goyda, senior vice president, consumer lending communications at Wells Fargo. “Additionally, as required by the CARES Act, no interest accrues during the forbearance period beyond the amounts scheduled or calculated.”
Andrew Demers, partner at Weiss Serota Helfman Cole & Bierman in Boca Raton, Florida, specializing in banking and real estate law, points out that it’s critical for borrowers to understand the payment terms of the forbearance and says they should ask key questions, including:
Do I have to pay interest or escrow advances during this time, or is this a complete payment deferral?
Is the loan maturity date being extended?
Will the lender 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, which requires a clear understanding of the parties’ respective rights and obligations,” Demers 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,” says Susan Atran, spokesperson for Bank of America.
Can lenders refinance once forbearance ends?
Generally, the borrower would have to pay off the foreborn amount (either with a new mortgage or cash) in order to refinance. However, there are variables that might affect whether a refinance is possible. Things like the type of loan you’re trying to refinance into, whether you ended up with a loan modification at the end of the forbearance and how the missed payments are being handled can all play a role in getting approved for a refinance.