COVID-19 Forbearance - Mortgage Forbearance Explained. What you NEED to know.

COVID-19 Forbearance - Mortgage Forbearance Explained

The federally mandated CARES Act came out in March of 2020 and originally said that there would be 90 days worth of forbearance for federally backed mortgages, such as Fannie Mae and Freddie Mac. Other mortgage companies also followed suit. This forbearance period was extended to 180 days, and now as of this date, has been extended another 180 days for a total of one year of forbearance.

If you are interested in getting mortgage loan forbearance, you have to APPLY! The CARES Act made student loan forbearance automatic, but this is not the case with mortgage loans. You also have to prove that you have had financial hardship, such as losing your job.

Be aware that loan forbearance is simply pushing off having to pay your loans; it is not loan forgiveness.

There are some problems that can come from loan forbearance because there is not any guidance from the government on what exactly will happen when this mortgage relief policy ends. A few examples of what could happen are:

A balloon payment which is when the forbearance period ends and all of those payments that were put on hold are now due in a lump sum. So for example, if you have a loan payment of $1,000 per month and you receive forbearance for one year, at the end of that year, you will owe your lender $12,000.

Payment reduction in which your monthly payment is reduced for an extended period of time, but when that time is up, the remainder of your monthly payment that was not paid will be added on to your upcoming payments. For example, if you pay $1,200 per month on your mortgage loan and your payment gets reduced to $600 for one year, after that year is up, your monthly mortgage payment will be $1,800 for the proceeding year to account for the $600 per month that was deferred when your payments were reduced.

Pause payment in which the lender pauses your payments for an extended period of time, then adds that amount of time in which your payments were paused on to the length of your loan. Say if you have your payments paused for one year on a 30-year mortgage, you will essentially now have a 31-year mortgage. This may not seem too bad, but think about the additional interest you will have to pay on that loan.

If you do decide to take advantage of mortgage loan forbearance, there are a couple of steps you need to do when applying for forbearance:

1. Figure out which company services your mortgage loan because it may not necessarily be the one you started the loan process with. That lender could have sold it to a secondary market. Whoever you make payments to is who services your mortgage.

2. Research to find out if your mortgage is federally backed, such as with Fannie Mae or Freddie Mac. If you have a VA or FHA loan, your loan is federally backed. If you have a conventional loan, you'll want to see if you fall into this category. If you find out that your loan isn't federally backed, ask your lender about any similar programs they may offer.

3. Tell your mortgage loan servicer or lender about your hardship. Let them know that you will have a hard time making payments because you lost your job, or whatever the circumstances may be.

4. Ask the mortgage loan servicer or lender what will happen when the forbearance period ends. It could be one of the outcomes we mentioned above, but double check so that you are aware and prepared.

5. Document everything! With so much chaos going on right now, make sure that you are documenting exactly what the bank or lender tells you when you call. Have them put into writing exactly what your specific arrangement is, preferably with the date and their signature.

Another big question we have been asked is, will going into forbearance tank my credit?

Honestly, no. As long as you are going into forbearance because of the COVID-19, it won't effect your credit. However, if you had issues that occurred before this pandemic, that may effect your credit. Talk with your bank or CPA to determine that.

Bottom line: If you can keep making your payments, keep making your payments. It is going to make things much easier in the long run if you don't have large payments of back pay due when all of this is over.

If you can't make your payments, take advantage of this program, but anticipate the future so that you don't get yourself into a situation in which you owe a lot of money that you can't pay back and have to liquidate your asset (sell your house).

If you have additional questions about mortgage forbearance, you can contact us here.

Also read our blog, Real Estate and COVID-19: Watch Out Homeowners and Get Ready Investors.