Know Your Rights When It Comes to Mortgage Forbearance

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If you’re struggling to pay your mortgage, you can hit the pause button on payments by asking your lender for forbearance. That sounds pretty great, right? Unfortunately, it’s not so simple, and it may not be the best option for you — you’ll have to get on the phone with your servicer to find out. 

As the U.S. economy continues to grapple with high unemployment and the ongoing effects of COVID-19, it’s become easier than usual for homeowners to enter into forbearance under the CARES Act, a $2 trillion coronavirus response bill passed in April. 

More than 4 million households have already entered forbearance programs, representing about 9% of outstanding home loans as of the end of May, according to recent data by the Mortgage Bankers Association.

Some experts expect more homeowners will seek forbearance in the coming months as the economy struggles to restart and enhanced unemployment benefits end.

“What economists are trying to see is: What happens in the summer?” says Jill Schlesinger, a certified financial planner and host of the “Jill on Money” podcast. “What happens when some people go back to work? And what happens after the end of July when people are not getting the extra $600 from the federal government for weekly unemployment?” 

If you’re considering mortgage forbearance, there are a few things you need to know. But most of all, you need to be proactive. New options provided by the CARES Act are available until December 31 2020 or if the president’s national emergency is rescinded, whichever is sooner — but they’re not automatic. 

What Is a Mortgage Forbearance?

Mortgage forbearance is a form of repayment relief that lets borrowers temporarily suspend or reduce home loan payments. It doesn’t erase what you owe — you’ll have to repay any missed or reduced payments later on, and regular interest will continue to accrue — but it does give you some breathing room to get your finances on track. 

“People are under false pretense forbearance is free money, and that’s far from the truth,” says Warren Goldberg, certified mortgage planning specialist and president of Mortgage Wealth Advisors in Plainview, New York. 

Before the CARES act, forbearances were granted by lenders after evaluating financial hardship applications backed with documentation. But now, the CARES Act allows borrowers with a federally backed mortgage to get forbearance relief for up to 180 days without the need to show proof of hardship. After six months, they can ask for an extension of up to another 180 days, bringing the total forbearance period to a year. There will be no penalty fees added for opting into forbearance. Those who are in forbearance can opt out at any point and go back to paying their mortgage as usual. 

How to Qualify for Forbearance Under the CARES Act

To be eligible for mortgage forbearance through the CARES Act, your loan must be backed by one of the federal agencies: Freddie Mac, Fannie Mae, VA, FHA, or USDA. According to data from the Urban Institute, two thirds of home mortgage debt is backed by a federal guarantee. 

What if you’re already late on payments? Your forbearance request will be approved regardless of delinquency. If you go into forbearance and your loan is past due, you’ll be reported as delinquent until you bring the account back into good standing.

Remember, forbearance does not mean forgiveness. Be sure you read all the fine print and ask how you’ll be expected to make up those missed payments. According to the Federal Consumer Financial Protection Bureau, there should be no additional fees, penalties, or additional interest during the forbearance period. But you should still ask if any circumstances would cause your loan interest to change, whether it’s a loan term extension or something else. 

After the forbearance period ends, federally backed loans do not require repayment of suspended mortgage payments all at once. These types of loans offer payments added to the end of the mortgage loan or paid back over time. 

Take caution, though: Not everyone will be eligible for every option. It’s best you contact your loan servicer to find out which options you may be facing.

Here are some examples of the repayment options you could qualify for:

Freddie Mac or Fannie Mae

  • Repayment of past due amount within 12 months past the end of the forbearance period
  • The total missed months added to the end of the mortgage term
  • The past due amount added to the total balance. The appropriate number of months will be added to the backend of your loan to keep monthly payments the same. 

FHA loans

  • Repayment of past due amount within six months past the end of the forbearance period
  • Lump sum due at the end of the loan
  • Extension of the mortgage term

VA loans

  • Repayment of past due amount within six months past the end of the forbearance period
  • Extend mortgage to make up for suspended payments
  • Lower payments to 31% of gross income and extension of the term

USDA loans

  • Repayment of past due amount within six months past the end of the forbearance period
  • Lump sum due at the end of the loan
  • Past due amount added to total balance. To keep monthly payments the same, the term will be extended. 

Private loans 

The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and other financial agencies have encouraged lenders and credit card companies to work with their borrowers and grant relief during the pandemic. But unlike federal agencies, private lenders are not required to provide you forbearance. 

Still, it couldn’t hurt to ask. “Even if you don’t have a loan backed by a federal entity, it’s definitely worth your energy to reach out to your lender and ask for forbearance,” Schlesinger says. “If you simply do nothing and miss payments, you’ll hurt your credit and chances of getting a loan in the future.” Make sure to ask your lender exactly what the repayment terms will be after the 180 days, Schlesinger says.

Don’t agree to forbearance terms you can’t live up to. Schlesinger says she has heard horror stories where people asked for forbearance only to learn it would be due as one lump-sum payment immediately afterward. “That’s a problem, obviously, if you’re still laid off and your enhanced unemployment benefits only run through July.” 

How to Apply for Mortgage Forbearance

Mortgage payment relief isn’t automatic. To request forbearance, contact your loan servicer directly. Have relevant information handy such as your account number. Remember to request your agreement outlining the details of the terms in writing. 

Be prepared to ask the following questions:

  • What forbearance options are available?
  • Will you waive late fees?
  • What options do I have to help with temporary reduction or suspension of my mortgage payments?
  • How will this agreement be reported to the credit bureaus? 
  • Will this affect my credit score?

Keep in mind the company servicing your loan and the company that owns it isn’t always the same. Many lenders sell the servicing rights for mortgages to other companies. Take a look at your mortgage statement to figure out who your loan servicer is. You can also look it up by searching the Mortgage Electronic Registration Systems website.

Alternative Forbearance Protections

Some states may have certain protections for mortgage borrowers, as well as additional assistance for homeowners. For example, Alaska’s housing authority is offering assistance with mortgage and rent payments with funding from the CARES Act. Alaskan residents who apply to the program will be placed in a lottery system to receive a one-time $1,200 payment.

Visit usa.gov to access your state government’s website and see what additional relief your state may offer.

Foreclosure options

The foreclosure process is different with every state, but the federal law says a loan servicer can’t start the state foreclosure process until your loan is more than 120 days past due. Your account will not be marked past due if you have a forbearance payment arrangement with your servicer. To find out more, take a look at your state’s government website.

Pro Tip

For access to free financial counseling on housing issues, check out the Department of Housing and Urban Development’s list of approved counselors.

Talk to a housing counselor for free

If you’re not sure where to start, there are hundreds of housing counseling agencies across the nation giving free financial advice. The Department of Housing and Urban Development has a list of approved housing counselors to advise on buying a home, renting, defaults, foreclosures, and credit issues.

Will Mortgage Forbearance Affect Your Credit?

Forbearance can save your home from foreclosure without putting a dent in your credit. 

Congress temporarily amended the Fair Credit Reporting Act under the CARES Act, so there should be no impact on your credit if your forbearance is approved through your lender (whether private or federally backed). 

The law mandates your loan servicer report your account as “current” as long as you have an accommodation agreement and the loan was current at the time of the arrangement. Accommodation agreements are credit-protected under the CARES Act as long as they were made between January 31, 2020, and until 120 days after the national emergency is officially lifted.  

That’s why it’s so important to have your agreement terms in writing — in case you need to dispute any adverse effects of the forbearance with a credit bureau. Payment history is the most important factor in your credit scores, so be sure to check your credit score often for any derogatory marks and correct them quickly if they’re inaccurate. 

Pros and Cons of Mortgage Forbearance

Our experts offer different advice on whether you should jump into a forbearance program. 

“If you’re a borrower and thinking about forbearance, don’t take it unless you’re struggling to put food on your table,” says Goldberg. Forbearance should be your last resort, Goldberg says, since there are so many moving parts and it’ll be difficult to determine the long-term impact. 

Schlesinger offers a different perspective and says people need to get ahead of their monthly recurring bills before they turn into a bigger problem. “Go back to the basics. Ask yourself: What bills do I pay for every single month? The only thing that’s nonnegotiable is food. So after that, everything should be a negotiation including your mortgage or your rent, your credit cards, and your utility bills. And that’s when you start just getting busy — don’t wait around and don’t hide,” Schlesinger says.

If you’re considering mortgage forbearance, here’s a breakdown of the pros and cons to help you decide what’s best for you. 

Pros of Mortgage ForbearanceCons of Mortgage Forbearance
• It gives you time to get your finances in order if you’re experiencing short-term hardship.
• You could avoid foreclosure and stay in your home.
• If your mortgage is federally backed, your credit won’t be affected. 
• If you’re not protected under the CARES Act, forbearance has less of a negative impact on your credit than foreclosure or a record of multiple late payments.
• Missed payments will add up during the forbearance period and must be paid back.
• Possibly a higher mortgage payment after the forbearance.
• It’s a short-term solution, so it won’t be helpful if you’re having trouble paying your mortgage in general. 
• If the lender places a derogatory mark on your credit report by mistake, it could affect your ability to purchase or refinance new mortgages for a period of time.