What happens when you can't pay your mortgage? If you have a federally backed mortgages, a new federal law, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, gives you the right to request a forbearance for up to 180 days (plus an extension for up to another 180 days). If you don’t have a federally backed mortgage, there may be relief options through your mortgage loan servicer or from your state.
What is Mortgage Forbearance?
Forbearance is when your mortgage servicer or lender allows you to temporarily pause paying your mortgage or make a lower payment. Forbearance only delays payments. You still have to pay the money that was deferred plus interest on deferred payments because in effect, this is a new loan.
The purpose of forbearance is to help you deal with a hardship. The current coronavirus shutdown of the economy is a good example. Other reasons for requesting forbearance is if your home was damaged in a flood, you have an illness/injury increasing your healthcare costs or you lost your job. Forbearance is typically granted to borrowers with temporary or short-term financial difficulty. If there are more serious problems, forbearance is usually not a solution.
It's also important to understand that even if your lender agrees to delayed payments, the lender must report your mortgage status which will reflect the delinquency and past due payments.
Here's a video that explains how the Coronavirus CARES Act is making forbearance available to homeowners.
Mortgage Forbearance Examples
There are no industry standards for how forbearance is implemented. Each lender has their own forbearance products which will differ based on the type of loan you have, the owner or investor requirements in your mortgage and the loan servicer.
The most important aspect of any forbearance product is the repayment plan. Here are the repayment options for government backed loans which represent more than 50% of all mortgages in the US. They include loans sold to Fannie Mae or Freddie Mac, and those insured by HUD, the VA, or the USDA. Here's where you can find out if your loan is owned by Fannie Mae or Freddie Mac (they have my mortgage).
Forbearance can be for 3, 6 or twelve months. It can be for your entire mortgage payment or partial. What you need to focus on are the repayment options which will affect your cash flow once you've gotten past your current financial difficulties.
- Lump sum payment – means you would pay the entire amount back in one lump sum. This is an option and fortunately not mandatory, as few homeowners can come up with the cash as they stabilize their financial situation.
- Short-term repayment plan – would allow you to repay your forbearance over six or twelve months. For example, if you postpone $1,000 mortgage payments for six months, you would need to repay an extra $500/mo over the following year.
- Extended loan modification – simply takes the amount you owe and tacks it onto the back of your loan. If you opted for a full year mortgage forbearance, your loan would be modified to reflect one additional year (possibly longer to incorporate the interest on the unpaid amount).
- Flex modification – is for homeowners who can't afford payments at their current interest rate and/or term (length of mortgage). In this case, the lender will work with you to modify the loan so that it's affordable … but tread carefully so you don't create a new/different problem.
- Cap and extend – covers borrowers who can't pay their property taxes and homeowners insurance (paid into an escrow account). The lender will pay these bills during forbearance and add the amount to the principal balance, increasing your payments once you come out of forbearance.
How Do You Get a Forbearance?
For more detailed information on mortgages and forbearance: