Due to the rapid rise in the unemployment rate as a result of the Coronavirus, Congress passed the CARES Act which includes a provision that provides mortgage relief to homeowners that have federally-backed mortgages. Homeowners are eligible for a 180 day forbearance on their mortgage payments which can provide much needed financial relief for individuals and families that are struggling due to the COVID-19 containment efforts. Even if you do not have a federally-back mortgage, some banks are voluntarily offering homeowners forbearance options on their mortgage payments. But before you choose this option, you should be aware of the following items:
- How does forbearance work?
- Who qualifies for mortgage forbearance?
- What is the process for requesting a forbearance?
- Does forbearance hurt your credit score?
- What are the repayment options?
- The hidden costs of forbearance
- Other options for mortgage relief
How Does Mortgage Forbearance Work?
Mortgage forbearance allows homeowners to defer monthly mortgage payments for a specific period of time. Under the CARES Act, homeowners that qualify, will be able to delay their mortgage payments for the next 6 months. But it’s important to understand that “forbearance” delays mortgage payments, it does not forgive those payment. At some point in the future, you will have to make up for those missed payments.
Who Is Eligible For Mortgage Forbearance?
Under the CARES Act, homeowners that have federally-backed mortgages are eligible for a forbearance up to 180 days. But as I mentioned above, homeowners that do not have federally-backed mortgages may also be eligible but it’s at the discretion of the loan servicer. How do you know if you have a federally-backed mortgage? Here is a list of the federal agencies:
- Freddie Mac
- Fannie Mae
Do You Have A Government Backed Mortgage?
If you are not sure whether or not your mortgage is backed by the federal government, there are a few ways to find out but we recommend not blindly calling the bank that issued your mortgage. The bank that issued your mortgage may be different than the company that “services” your mortgage. It’s not uncommon for lenders to sell the servicing rights of their mortgages to other companies. If you are considering applying for forbearance, you will need to consult with the loan servicer.
As you can image, these loan servicing companies are being overwhelmed right now with homeowners requesting forbearance of their mortgage payments. If you are able to determine whether or not you have a federally-backed mortgage yourself, it will save you time and frustration. Here are a few different ways to determine if your mortgage is backed by a federal agency:
- FHA Insurance Payments: If you look at your mortgage statement and you see FHA insurance payments being made, your loan is backed by the FHA. You can also look at your mortgage closing documents, specifically your HUD form.
- Fannie Mae & Freddie Mac Websites: Almost 50% of all mortgages issued in U.S. are backed by either Fannie Mae or Feddie Mac. You can run a search on their websites to determine if your mortgage is backed by either of those two agencies.
- Contact Loan Servicer: If you are still unable to determine whether or not your mortgage is federally-backed, you can contact your loan servicer. The contact information for your loan servicer is usually listed on your monthly mortgage statement but if you don’t have access to your statement, you may be able to locate your loan servicer via the Mortgage Electronic Registration System
Mortgages Not Backed By A Federal Agency
If your mortgage is not backed by a federal agency, you still may be eligible for a mortgage forbearance but that will be at the complete discretion of your loan servicing company. You will need to contact your loan servicer but unlike federally-backed loans, they are not required to offer you a forbearance. You should be prepared to answer a number of questions such as:
- Why are you applying for the forbearance?
- How long do you need the forbearance for?
- Details about the status of your income, expenses, and employment
The Forbearance Process
Whether you have a federally-backed mortgage or not, you will have to pro-actively reach out to your loan servicing company to request the forbearance; it does not happen automatically. If you qualify for the forbearance, there are two key pieces of information that you should obtain before that call is finished.
- Determine the repayment terms for those missed payments
- Request your forbearance agreement in writing
Since you have to repay these missed mortgage payments at some point in the future, it’s incredibly important to understand the terms of the repayment. Some loan servicing companies are requesting a “balloon payment” which means if you are granted a 6 month forbearance, when you reach the end of that 6 month period, all of the missed mortgage payments are due in a lump sum amount; not a favorable situation for most homeowners. Here are the three most common repayment options:
- Balloon Payment: All of the missed payments are due as a single lump sum payment at the end of the forbearance term. This is the least favorable option for homeowners.
- Extended Term: This option extends the term of your mortgage by the length of the forbearance. If you receive a 3 month forbearance and you have a 30 year mortgage, they will extend the term of your 30 year mortgage by an additional 3 months. This is usually the most favorable option for borrowers.
- Re-amortize The Loan: Unlike the “extend the term” option, the maturity date of your mortgage stays the same, and when you restart mortgage payments at the end of the forbearance period, they spread those missed payments over the remaining life of the mortgage. This will result in a slightly higher mortgage payment compared to your mortgage payment prior to the forbearance period.
Get The Forbearance Offer In Writing
With all of these moving parts, it’s extremely important to request that your loan servicer sends you the forbearance agreement in writing. You definitely want to make sure nothing was missed or miscommunicated otherwise you could damage your credit score, end up in a foreclosure situation, or have an unexpectedly large mortgage payment waiting for you at the end of the forbearance period.
Does Mortgage Forbearance Affect Credit?
If done correctly, a mortgage forbearance will not negatively impact your credit score.
Hidden Cost of Forbearance
While there are no late fees assessed on these missed mortgage payments associated with a forbearance agreement, there is additional interest that accumulates over the remaining life of the mortgage when the repayment option involves either an extended term or re-amortization.
Example: Homeowner has a $250,000 federally-backed mortgage, 4% interest rate, with 20 years left on the mortgage. This homeowners was financially impacted by COVID-19 and is granted a 6 month forbearance with an extended term repayment. How much additional mortgage interest did that individual pay over the remaining life of the mortgage due to that 6-month forbearance?
So this option is not “free” by any means but it may be a reasonable price for homeowners to pay compared to the negative financial impact of missing mortgage payments without forbearance.
Other Options Beside Forbearance
If your bank does not grant you forbearance, or you want to consider other options, the CARES Act did open up other forms of financial relief to taxpayers in the form of:
- Penalty Free Distributions From IRA’s & 401(k) Plans
- 401(k) Loans Up To $100,000
- IRS Stimulus Checks
Each option has it’s own pros and cons but you can read more about these options via the links above.
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.