Times are hard right now and we understand there is a lot of panic with the uncertainty of what’s to come. You’ve probably been hearing a lot about forbearance lately so let’s clear a few things up about the new CARES Act, forbearance, and what all this really means for homeowners.
The CARES Act
In the wake of millions of job losses caused by business shutdowns due to the coronavirus, the Federal Housing Finance Agency (FHFA) and the Department of Housing and Urban Development (HUD) have instructed mortgage lenders and services to extend forbearance options for homeowners who are currently dealing with financial strain. Click here for additional information.
The $2 trillion federal CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was recently passed by Congress and is now offering relief to about 70% of those who have home mortgages. It is also stated within this Act that foreclosures on homes during this time will also be prohibited (for people with federal-backed mortgages).
If you’re a homeowner with a government-backed mortgage, and you’re having trouble paying your monthly mortgage payments due to the coronavirus pandemic, you are eligible for the CARES Act.
What is forbearance?
First things first, this is not free money. To put it simply, forbearance is just a pause in payments. It is not the forgiveness of what you owe on your home. You’re just delaying your mortgage payments which could ultimately put you in a bigger bind.
Right now, the law allows you up to 180 days of forbearance, and then can be renewed for another 180 days. Your lender is not allowed to add any penalties, fees, or additional interest to your current scheduled monthly payments. Your regular interest will still accrue. Click here to learn more from the Consumer Financial Protection Bureau.
To qualify for the CARES Act forbearance option, you must hold a mortgage backed by Fannie Mae, Freddie Mac, the U.S. Department of Agriculture, the Federal Housing Administration, the U.S. Department of Veterans Affairs, or the U.S. Department of Housing and Urban Development.
If you don’t know if your mortgage is federally backed or not, you can call your servicer and find out. Make sure you have your account number handy if you call. Please note, it could take a while to get a mortgage servicer on the phone since call volumes are very high right now. (Your servicer is who you pay your mortgage payment to each month.) Or, you can use an online search tool and look up your address on both sites here:
Also note that it’s important to get everything in writing from your servicer that confirms the details of your forbearance agreement. Your terms of agreement are vital for what happens after forbearance.
So, you decide to move forward with the forbearance option to delay payments for your home loan. What’s next? At the end of your forbearance period your monthly payments will start back up again. You will then be responsible for paying back the money that you initially paused.
Depending on your servicer, you may be able to modify your loan, make all your missed payments at one time, or make additional payments to the end of your mortgage as a repayment plan.
Here's a few examples of how this could work for you:
- Lump-sum payment: If your normal monthly mortgage payment is $1,500 and you paused your payments for 6 months due to financial hardships, you could owe $9,000 at the end of your forbearance period plus your regular monthly payment of $1,500. That’s $10,500 at one time! Can you swing it? Many people won’t be able to. Note: If you have a mortgage with Fannie Mae or Freddie Mac, you will never be asked to repay missed payments in one lump sum. We are hoping to hear similar news from other government loan programs on this option soon.
- Short-term repayment plan: If you go the route of adding payments to the end of your mortgage, you would spread that $9,000 over 12 monthly payments (while still paying your regular $1,500 a month) which would make your new monthly payment $2,250 a month for the next year.
- Loan modification: You may also have an option for an extended loan modification which means your mortgage term can be extended. So, if you have 25 years left to pay on a 30-year mortgage and you postponed your payments for 6 months, your new loan term would be 25 years and 6 months.
We highly suggest you consider seeking professional advice as you are weighing your options for mortgage forbearance.
Be aware of scams during this time.
Be careful who you share your information with every day, but especially during this time of distress. There has been an uptick in “mortgage rescue” scams with scammers pretending to be lenders or attorneys. These scammers are targeting homeowners who are struggling right now and making false claims about being able to help with finances. If you think you’ve been a victim of a mortgage-related scam, reach out to an attorney for guidance.
The bottom line.
This is a big decision and you need to seek the truth about the required repayment plan. We highly recommend you do your own research to fully understand exactly how you will be expected to repay – one lump sum versus and amortized plan—and if you’ll be able to fulfill that agreement when you’re back on your feet. Click here to watch a video from the Consumer Financial Protection Bureau explaining this further.
If you’re in a situation where you can pay your mortgage on time, then do it. If you cannot pay your mortgage or can only pay part of it, contact your mortgage servicer immediately. And if your income is restored while you’re on a forbearance program, start making payments as soon as you can to get off your forbearance plan.
Check out these additional resources to help you understand the CARES Act Mortgage Forbearance option: