One of the most important provisions for consumers in the federal CARES act is the right to a twelve-month forbearance (a break) on mortgage payments for any borrower with a loan owned or insured by certain government entities. This can be a huge help to borrowers who are in financial difficulty right now, but also comes with some risks.
What loans qualify for the program?
The law applies to any loans owned by Fannie Mae and Freddie Mac, insured by HUD, the VA, or the USDA, or directly made by the USDA. According to the CFPB, nearly half of all U.S. home mortgages are owned or backed by Fannie Mae or Freddie Mac. Some borrowers can look up their loans at this link, to see if you qualify.
If your mortgage does not qualify for this program, your individual servicer may have its own forbearance program, just call to find out.
How do I get a break on my payments?
Typically you can call your servicer to request the forbearance. They have to offer it to all qualifying borrowers any obstacles, including no fees, charges or additional interest. The forbearance also may not result in any negative credit reporting. Note, the payments are not forgiven, they need to be repaid after the end of the forbearance through a few different payment options. You should ask your lender, before you take the forbearance, how missed payments will be handled.
How do I repay my mortgage payments once the forbearance is over?
This is one of the biggest unanswered questions about this program, and a potential real danger for people who participate in it. And many borrowers have not been able to get their lenders to commit to what will happen until the payments actually come due. There are a few different possible payback options:
Lump-sum payback at the end of the forbearance: This is the scariest option for most borrowers—that they’ll be required to pay the missed payments back in full, all at one time. This is likely to be impossible for most people.
Short-term mortgage modification: This option, first of all, assumes that the economy will be back to normal after 12 months, but also requires that borrowers stretch to pay the missed payments back over a few months to a couple of years. This option is likely to result in many foreclosures in the coming year.
Long-term mortgage modification: Allowing borrowers to spread their missed mortgage payments out over the remaining term of the mortgage will help keep more people out of foreclosure. For example, for a borrower with a $1,500 mortgage payments and 20 years remaining on their mortgage, a one-year forbearance will increase their monthly payment by $75 per month for the remainder of the loan.
Tacking payments onto the end of the mortgage: Another good option that will keep people out of foreclosure is to take the missed payments and add them to the end of the mortgage, extending the length of the mortgage loan up to 12 months. This options should help people get through the hard times without attaching a ticking time bomb to the end of the 12-month forbearance.
What if I need help when my mortgage forbearance is over?
There may be a couple of ways to get help if your mortgage company is asking for an unreasonable increase in your payments at the end of a forbearance. One would be to apply for a loan modification with the services. Another would be to file Chapter 13 bankruptcy, to spread the missed mortgage payments out over five years and allow you to pay it back a little at a time.
This is all new territory for everyone, so please let us know if you have any issues and we can help.