Mortgage forbearance may serve as a lifeline to delinquent borrowers who are at risk of foreclosure. However, have you thought about what you’ll do once the CARES Act ends if you can’t make your mortgage payments?
The bill is set to expire on June 30, 2021. It’s possible that Congress will extend the protection. However, at some point, this relief will no longer exist.
Accordingly, it’s important for those in danger of going into default with a mortgage to remedy the situation while they’re still protected under the CARES Act.
Keep reading to get answers to frequently-asked questions about the CARES Act mortgage forbearance.
What Is the CARES Act Mortgage Payment Forbearance?
The CARES Act stands for the Coronavirus Aid, Relief, and Economic Security Act. The federal government and congress passed the CARES Act in March 2020. It’s the federal government response to temporary shutdowns and job losses. In part, the financial portion of the CARES Act resulted in the Paycheck Protection Program.
The CARES Act also expanded unemployment assistance. Furthermore, it provides reduced payments for emergency loan funding. It even provides for a temporary waiver of student loan interest payments.
More importantly, however, another part of the CARES Act provides mortgage forbearance.
This portion of the bill permits federal agencies to forgive mortgage debt when homeowners are faced with financial hardship. This benefit could help those who can’t afford their monthly payments because of unemployment or underemployment.
Resultantly, the federal legislation provides relief. It aids those who are struggling to pay their mortgage due to unemployment, financial hardship or other factors.
Congresswoman Senator Tammy Baldwin introduced the CARES Act in February 2019. The forbearance portion of the bill provides 12 to 18 months of relief for homeowners experiencing financial difficulties related to unemployment, disaster recovery and personal health issues.
How Does Mortgage Forbearance Work?
Mortgage forbearance provides you with temporarily-paused payments and relief on your mortgage. If you’re struggling financially and experience financial hardship due to the COVID-19 crisis , it offers you mortgage relief. All you have to do is to submit additional documentation and request forbearance on your mortgage payments.
There are different kinds of federally-backed mortgage loans. The qualification process is different depending on the type of mortgage relief.
The CARES Act gives you the option to request up to a year of mortgage repayment forbearance relief. The relief is renewable in six-month spans.
However, some homeowners can request a bit more time. There are two kinds of forbearance—loan modification and deferral.
Loan modification is one type of relief under the CARES Act. Some homeowners may qualify for this type of relief.
In that case, the mortgage servicer will change the terms of your current loan. It will now include any past due payments.
It’s in your best interest to pay your loan up to date as soon as possible. Loan modification also gives you the option to pay back the full past due balance at once. However, this kind of payment isn’t possible for everyone.
In either case, you’ll want to make sure that you communicate with your lender.
Also, be aware that a loan modification could extend your loan by many months or even by several years and thus significantly increase the total amount you will pay for your house. So, read the loan documents carefully and determine if it makes financial sense in the long run.
Otherwise, you might qualify for a loan deferral. With a loan deferral, the lender will set all or part of your past due balance aside. You can pay off this amount later.
You must pay off a deferral when you pay off your mortgage or refinance. You must also pay off a forbearance deferral if you sell your home.
The lender will not charge you any additional interest on the deferred balance. If you enter a repayment plan, they’ll add part of your past due balance to your regular mortgage payment.
When Does Mortgage Forbearance End?
To date, there are over two and a half million borrowers in forbearance. If you’re among this group, there are a few things you need to know if your forbearance deadline is approaching.
When mortgage forbearance ends, you must catch up on your missed monthly mortgage payments. The initial forbearance period lasts 12 months.
Once 12 months have passed, you can request another three-month forbearance extension. You can receive 18 months of forbearance in total.
It’s important to understand that you will not automatically receive forbearance. You must communicate with your mortgage provider.
Some private lenders will allow homeowners to resume payments as if nothing happened. However, others will request that homeowners pay their past due amount once forbearance ends.
How Do I Apply For Mortgage Forbearance?
Communication is important when it comes to forbearance programs. To apply for forbearance, you must speak with your mortgage servicer. You’ll need to request mortgage forbearance directly. There are no additional fees, penalties or interest to participate in forbearance loan payments.
You also don’t need to submit additional documentation. All that’s needed is for you to claim that you have pandemic-related financial troubles.
Your first forbearance period may last three to six months. In most cases, you can extend forbearance up to 12 months. Some loan servicers, however, can extend forbearance for up to 18 months.
Hopefully, you were able to recover from your financial troubles quickly. If not, in case you are experiencing financial hardship or pandemic-related financial hardship, you can request an extension. Ask your mortgage servicer or your mortgage company to discuss repayment options.
Forbearance is also available for federally-backed mortgages. Here, it’s important to figure out who your mortgage servicer is.
Alternatively, you might have a HUD, USDA or VA loan. Again, you can request up to two added three-month extensions.
However, not all HUD, USDA or VA borrowers will qualify for the extension. To apply, you must’ve secured a loan through one of these agencies on or before June 30, 2020.
What Happens When Mortgage Forbearance Ends?
The answer to this question isn’t as straightforward as you might think. If Congress doesn’t reauthorize the Cares Act, loan servicer might have the ability to foreclose on your home without first offering a modification or other solution.
If you’re struggling with your monthly payments, you missed or reduced payments, now is the time for homeowners who want permanent relief to take action before that changes. Hopefully, you’re ready to resume payments once your forbearance ends.
It’s important to understand that forbearance is not loan forgiveness. You’ll still owe the principal and interest that you didn’t pay during the forbearance period.
When forbearance period ends, you’ll need to make your regular mortgage payment. However, you’ll also need to cover the payments you missed while your loan was in forbearance.
At this point, you’ll need to think about whether a modified loan or deferred loan payments works best for your needs.
Does a Mortgage Forbearance Affect Your Credit?
Mortgage forbearance is a pause on your payments. However, mortgage servicers will not report the relief and non-payments to credit bureaus.
Again, however, forbearance does not forgive your loans. Instead, it allows you to catch up on your payments later.
Most often, lenders require borrowers to add missed payments to the end of their scheduled payments. For example, you might miss eight months of mortgage payments. In that case, the mortgage servicer will extend your payments for eight more months.
Still, some homeowners will have to make higher payments when their forbearance ends. Fortunately, lenders can’t demand the entire sum of late payments if you were in forbearance. However, even higher monthly payments can prove impossible for some homeowners to manage.
Nevertheless, you’ll want to watch your credit score closely. If you receive forbearance, check your credit report at credit bureaus often.
The CARES Act states that mortgage servicer should not report late payments while you’re in forbearance. They also should not report missed payments. Technically, forbearance should not harm your credit.
However, people make mistakes. Resultantly, you might find that your late or missed payments get reported, despite the guidelines of the CARES Act. It’s not unheard of for credit problems to arise due to a forbearance.
Will Forbearance Affect Refinancing?
Generally speaking, forbearance will not affect refinancing–IF you qualify for it. If your income and/or credit scores are now lower due to your recent financial hardships, your chances of getting approved for refinancing may very well be affected.
When you refinance, you’ll want to lock in a lower interest rate. You’ll also want to secure a lower monthly payment. These benefits may make it easier for you to resume your mortgage payments.
Refinancing is invaluable to homeowners who chose a modified payment plan, where they’ll pay a higher monthly payment to catch up. However, there’s a catch.
You can’t refinance your home immediately after receiving forbearance. However, a lender might allow you to refinance your loan after making three consecutive payments once forbearance ends.
If you have a conventional FHA loan or USDA loan, you’ll need to make at least three payments after forbearance. Once you have made the payment, you’ll most likely find that you’re eligible for financing. Still, it shouldn’t take more than three months to qualify for forbearance.
Some FHA (federal housing administration) borrowers might qualify for a streamlined refinance loan. If so, they won’t need to make three months of payments to qualify for refinancing.
It’s even easier to qualify for refinancing if you have a VA loan. In this case, there’s no waiting period to apply for refinancing.
However, keep in mind that refinancing is not free; there are costs associated with it such as lender fees and closing costs. So you will need to weigh the pros and cons of refinancing for your particular situation.
Can You Sell Your House While in Forbearance?
Some homeowners may still not have the ability to make mortgage payments once forbearance ends. If you face this circumstance, you might wonder if you can sell your home to get your finances back on track and provide additional resources.
Yes, you can sell your house while in forbearance in most instances.
There’s no part of the CARES Act forbearance that says you must stay in your home if you applied for a forbearance request. If you sell your home, however, you must pay off everything—including all unpaid interest and fees.
When forbearance ends, you may still face financial difficulty as the relief period is drawing to a close. In some instances, you can request an extension and a lender may consider extending forbearance if you prove that you’re selling your home to cover the remaining payments.
A lender would prefer to receive full payment rather than go through the foreclosure process. With a foreclosure, the lender would receive a much smaller amount compared to the outstanding balance of the mortgage.
Short Sales While in Forbearance
You also don’t have to go through the short sale process if you want to sell your home while your mortgage is in forbearance. Of course, you may consider this option if your home is worth less than what you owe on your mortgage. This scenario does occasionally arise during the pandemic.
When homeowners get far behind in interest and fees, the balance owed can add up. In this instance, they’ll end up upside down in their mortgages. They now owe more than the value of their home.
In this case, the borrower might make an agreement with the lender. The lender will agree to accept a lower amount to pay off the mortgage. Once the borrower sells the home, the lender will report the mortgage as paid.
A short sale is not an ideal scenario. However, it has less of an impact on your credit compared to losing your home to foreclosure.
Finding a Buyer for Your Home Fast
You may not have recovered from the financial hardship due the pandemic as the end of your forbearance draws near. If so, you may want to consider your options. One option is to sell your property before foreclosure.
It’s not too late to sell your house before forbearance ends. If you can’t make future payments, it’s possible that you could work out an agreement with the lender and avoid going through the foreclosure process.
A better option might be to list your home on the MLS. With the real estate market being so hot right now and so many homes are being sold above asking price, this might be the best time to get the most for your home, providing you with the financial means to move on and get a fresh start.