If you’re hard-up financially, skipping a mortgage payment - or two - can be a life-saver. But there are consequences you need to be aware of.
With the coronavirus pandemic still shuttering large swaths of the economy, Congress has stepped in to help struggling homeowners. The $2 trillion Coronavirus Aid, Relief and Economic Security, or CARES, Act, passed in March, included not only millions of cash stimulus checks, but also special aid for homeowners.
The new law makes it much easier for homeowners whose lives have been upended by the pandemic to seek what’s called forbearance — essentially hitting a pause button on their mortgages — for up to one year, hopefully until the economy begins to recover.
While only homeowners with federally backed loans are eligible, more than 4 million households have entered forbearance programs since the law passed — nearly one out of every ten borrowers.
Although the idea of putting your biggest financial commitment on hold can seem tempting, there are drawbacks. For one, it’s not a free lunch. Interest tied to your skipped payments still accrues, and you’ll have to make it up later. And while The CARES act stipulates forbearance shouldn’t affect your credit, it could still make it hard to get a new loan.
For these reasons, experts say mortgage forbearance should still be a last resort. Here’s what you need to know:
What is forbearance?
Forbearance is a form of repayment relief that allows borrowers to temporarily suspend or reduce mortgage payments. If you’re in a short-term financial bind, a forbearance can save your home from foreclosure without putting a major dent in your credit, buying time until you get back on your feet.
Before the CARES Act, forbearances were typically granted by lenders only after a careful evaluation of financial hardship. They frequently required detailed documentation. Borrowers with a history of on time payments were also more likely to be approved for forbearance.
How does the CARES Act change forbearance rules?
Now federal law makes asking for forbearance simple for many borrowers with coronavirus-related health or financial problems. If you have a federally-backed mortgage, you simply need to contact your lender and let them know you won’t be able to pay your mortgage bill due to the current public health crisis. Lenders are required to approve forbearances regardless of your delinquency status.
Additionally, you won’t need to provide documentation such as costly medical bills or evidence of a job loss to prove your hardship when you apply, although you will want to demonstrate it later.
Through the CARES Act, you have the right to request forbearance for up to 180 days, with the possibility of another 180 days if you’re still under financial distress. As part of the relief program, you will also be given a mortgage payment reduction option, where future make-up payments will be spread out over 12 months or added to your mortgage payment once the reduction period is over.
As of March 18, the law also includes a foreclosure moratorium of at least 60 days which prohibits lenders and services from taking foreclosure-related eviction action during this period.
Who is eligible for forbearance under the CARES Act?
If you have a federally-backed mortgage, you’re in luck. Mortgage relief in the CARES act applies to borrowers with loans backed by the following entities:
- Fannie Mae and Freddie Mac
- U.S. Department of Agriculture (USDA loans)
- Department of Veteran Affairs (VA loans)
Since Fannie and Freddie don’t issue mortgages, just insure them, experts recommend you contact your mortgage servicer, the company that bills and handles your payment processing, to ask if your loan is backed by either of those entities and if you’re eligible for coronavirus assistance.
If your loan is not federally backed, contact your loan servicer, state or local government resources such as the Consumer Financial Protection Bureau (CFPB) to find out what options you have.
How do I apply for mortgage forbearance?
To apply for forbearance, contact your lender directly. While the CARES Act stipulates you aren’t required to demonstrate financial need, experts recommend you write a hardship letter to keep track of your economic situation.
In your letter, you should explain that you’re struggling to pay your bills due to the coronavirus emergency and state how your overall finances have changed.
This could boost your chances of getting a more comfortable repayment option once the forbearance ends, says Josh Lewis, mortgage broker and owner of Buy Wise Mortgage. But note that under the CARES Act, you are not obligated to provide evidence of financial hardship for forbearance.
Once you have applied, you will receive a mortgage forbearance agreement from your lender which will outline terms of your forbearance including how your payment history will be reported to credit bureaus, and how your missed payments will be made up once the forbearance ends.
Forbearance requests are being approved very quickly, said Lewis. Some borrowers have been approved on the initial phone call and most are approved within a few days.
“In fact, it’s been so easy to get approved that some people who simply inquired about forbearance were approved instantly,” added Lewis.
Will mortgage forbearance hurt my credit under the CARES Act?
No. To safeguard Americans’ credit scores Congress temporarily amended the Fair Credit Reporting Act (FCRA) to protect your credit from circumstances beyond your control. Under the new rule, direct servicers, the companies that bill you, must report accounts that receive relief such as a forbearance, as current to the main credit reporting bureaus—Experian, TransUnion, and Equifax.
In other words, once a forbearance is reported, your loan account is virtually frozen with no added fees or penalties that will negatively impact your credit score.
For example, if your account is current at the beginning of your forbearance it will remain current at the end of the program. If your mortgage was 30 days delinquent prior to your forbearance, it will remain 30 days delinquent at the end of the relief period, unless it is made current.
There is one caveat. While forbearance won’t affect your official credit score, lenders will be able to see that you were or are in forbearance and they may, if they want, consider that fact in deciding to give you future loans.
When and how do I make up missed payments?
Unfortunately, a mortgage forbearance does not mean that your payments are forgiven.
Sooner or later, you’ll be required to repay missed payments in full. One piece of good news: Those with federally backed mortgages won’t have to worry about paying it all at once.
Outside of mortgages covered by the CARES Act, lenders can demand a lump-sum payment covering missed principal and interest as at the end of the forbearance period. Congress ensured that borrowers with federally-backed loans will have additional options.
One option is a repayment plan that allows you to spread out your past-due payments over a given period of 12 months. What this means is that you’ll be able to make your regular mortgage payments plus a portion of your past-due balance for an agreed upon time until you pay off the amount owed from your forbearance in full.
The CARES Act also lets borrowers add the amount of the missed payments to the balance of their loans. If you have a Freddie Mac or Fannie Mae backed loan, you can also extend the term of mortgage by the same number of months you were in forbearance, up to a 40-year term. Those with VA, FHA, or USDA loans have the option to extend their mortgage term to 30 years.
Keep in mind that forbearance will remain in your credit report and may restrict your options for getting a new loan in the future, depending on your lender.
I have a non-conforming mortgage loan, is there anything I can do?
If you have a mortgage that is not covered by the CARES Act and you’re struggling to meet payments as a result of financial or health hardship, experts suggest contacting your loan servicer to discuss payment options.
In some cases, lenders may offer a loan modification, loan, or their own coronavirus assistance programs. Some state or local governments have been implementing other mortgage relief programs too.