Pandemic Forbearance Explained — Rent the Mortgage
Original Post: https://rentthemortgage.com/pandemic-forbearance
Unless you have been living under a rock, you have probably heard of mortgage forbearance as it relates to homeowners affected by Coronavirus. Roughly 3.6 million homeowners remain in pandemic-related forbearance plans as of this blog post (October 2020). That’s 6.8% of all active mortgages, representing $751 billion in unpaid principal. The CARES Act mortgage forbearance (also referred to as pandemic-related or Covid-19 forbearance) is different than traditional forbearance.
Homeowners, like myself, are affected by Covid-19 because we have tenants who have been laid off or furloughed from their jobs. Luckily I am still employed during this time. Learning from the 2008 financial crisis, the US government unanimously passed the CARES Act on March 27, 2020 to prevent another economic meltdown during the Coronavirus pandemic. The intention of the CARES Act was to keep people employed with paying bills for essentials like food and rent just like in a “Normal Economy Cycle”.
What is Traditional Mortgage Forbearance
When a homeowner experiences difficulty in making mortgage payments to the lender, one option is forbearance. Mortgage forbearance is an agreement to suspend payments that is made between the borrower and the lender. With a traditional forbearance, the lender agrees to reduce or suspend mortgage payments for a specified period of time. During traditional forbearance, the lender agrees not to initiate a foreclosure in exchange for detailed documentation proving your financial hardship. However, late fees and past-due payments are reported to credit bureaus which negatively affects the borrower’s credit score. Boo.
What is the CARES Act Mortgage Forbearance
“The CARES Act provides a mortgage payment forbearance option for all borrowers who, either directly or indirectly, suffer a financial hardship due to the novel coronavirus (COVID-19) national emergency.”
The CARES Act mortgage forbearance is different than a traditional forbearance. When the CARES Act was initially passed in March 2020, there was no relief for homeowners who also experienced financial hardship and began missing mortgage payments. This was caused by either a tenant who was no longer able to afford rent or a homeowner being laid off from his or her job. The Payroll Protection Program was able to help those lucky enough to still be employed but a “Covid-19 Economy Cycle” was beginning to emerge. Therefore, the CARES Act mortgage forbearance was created with Fannie Mae and Freddie Mac loans but now many banks have followed their lead to offer CARES Act forbearance options. One primary difference of the CARES Act forbearance option is that late fees and past-due payments are NOT reported to credit bureaus.
Summary of Traditional versus CARES Forbearance
Below is a summary of the Traditional Mortgage Forbearance and the CARES Act mortgage forbearance.
Credit bureaus will be alerted of past-due payments and late fees.
Lenders must suspend reports to credit bureaus of past-due payments for borrowers in a CARES Act forbearance plan.
Interest and Penalty Fees
Generally, interest and penalty fees will continue to acrue during traditional forbearance.
No penalties or late fees for homeowners in CARES Act forbearance plan.
Detailed documentation is required to prove financial hardship.
No documentation is needed to qualify for CARES Act forbearance.
Traditional forbearance length period is determined by lender.
Up to 180 days, generally offered in periods of 3-month increments.
Deferred payments are generally due in lump sum at end of forbearance.
Deferred payments can be paid in a lump sum at either end of forbearance or the end of the loan.
What loans are covered under the CARES Act
The types of mortgage loans covered under the CARES Act include conventional, FHA, VA, and USDA loan backed by the Fannie Mae and Freddie Mac. If you have this type of mortgage, your payments can be suspended for up to six months with no penalties when in forbearance. Many private lenders and banks have also started to offer forbearance options similar to the CARES Act so best to check with your lender.
By loan type, 4.7% of all Fannie and Freddie-backed loans are in forbearance, while 11.2% of all FHA/VA loans are. For private label and bank-held loans, that share is 7.3%.
Does forbearance hurt your credit score
With a traditional forbearance, the lender agrees to reduce or suspend mortgage payments for a specified period of time. During traditional forbearance, the lender agrees not to initiate a foreclosure in exchange for detailed documentation proving your financial hardship. However, late fees and past-due payments are reported to credit bureaus which negatively affects the borrower’s credit score.
Being in forbearance under the CARES Act will not hurt your credit score. Congress temporarily amended the Fair Credit Reporting Act (FCRA) to protect homeowner participation without penalty. In other words, the three main credit reporting bureaus of Experian, TransUnion, and Equifax will record forbearance but without negatively impacting your credit score.
Can I refinance if my mortgage is in forbearance
Refinancing your mortgage with another lender requires that you are current with your loan payments and not be in forbearance.
If you are currently on a forbearance plan with your mortgage lender and hope to refinance your loan, contact your lender immediately to end the forbearance so you can start making monthly payments again.
If your loan is backed by Fannie Mae or Freddie Mac, just make your next three consecutive monthly payments on time. Once that is completed, you will be able to start the process of refinancing your home.
This Experian article does a nice job of summarizing the above steps to exit forbearance.
Ask for a Mortgage Loan Modification instead
If you are in forbearance, another option would be to ask your existing lender for a mortgage modification. A mortgage loan modification changes the original terms of your loan permanently. These loan modification changes could include lowering interest rate, extending the length of loan, or selling the home for a specified price.
A loan modification generally requires that you be in default with the mortgage which negatively affects your credit score. However, one bright spot from being in the middle of this Coronavirus pandemic is taking advantage of the credit protection. Being in forbearance under the CARES Act will not hurt your credit score. Congress temporarily amended the Fair Credit Reporting Act (FCRA) to protect homewoner participation without penalty. Therefore, homeowners now have a fighting chance to opt for a loan modification without hurting their credit.
How long can you use forbearance
The period length of traditional forbearance is determined by the lender. The period should allow enough time for the borrower to provide documentation and evidence that proves financial hardship to the lender. Depending on what agreements you reach with your lenders and creditors, they may agree to allow decreased or delayed payments for a specific time period of up to 12 months.
Under the CARES Act, borrowers are entitled to an initial forbearance period of up to 180 days, upon a borrower’s request. Also, upon a borrower’s request, the forbearance must be extended for up to an additional 180 days. A borrower can, at any time the borrower chooses, shorten the forbearance and resume repayment of the loan.
What happens after forbearance ends
To exit forbearance, the suspended balance must be paid in full and is not forgiven. No free money. If possible, the borrower can exit forbearance with a lump sum payment for the suspended balance at any time. Probably an unlikely scenario given the reason you asked for forbearance due to financial hardship.
More suitable options include making arrangements with the lender to append the suspended balance at the end of the loan as either additional monthly payments or a lump sum payment. Another option, as mentioned above is to attempt a loan modification with your lender where the loan terms are changed. These loan modification changes could include lowering interest rate, extending the length of loan, or selling the home for a specified price.
The CARES Act mortgage forbearance (also referred to as pandemic-related or Covid-19 forbearance) is different than traditional forbearance. One primary difference of the CARES Act forbearance option is that late fees and past-due payments are NOT reported to credit bureaus.
Roughly 3.6 million homeowners remain in pandemic-related forbearance plans as of this blog post (October 2020)
To exit forbearance, the suspended balance must be paid in full and is not forgiven. Arrangements can be made with the lender to exit forbearance include:
- pay back the suspended balance as a lump sum payment at end of forbearance period
- append the suspended balance at the end of the loan as either additional monthly payments or a lump sum payment
- ask lender for mortgage loan modification to change terms of the loan
Anybody care to share your forbearance experience during this pandemic period of our lives. Let me know in the comments.
Charlie started Rent the Mortgage in 2019 to begin documenting his financial lessons with the intent of inspiring others to start their FIRE journey through real estate. He bought his first home at age 31 during a mortgage crisis in 2010 and has included real estate in his financial portfolio ever since. Charlie works in tech at Silicon Valley and recommends investing in employer-provided benefits such as RSUs, 401k, and ESPP. Charlie has been featured on Authority Magazine.
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Originally published at https://rentthemortgage.com on November 4, 2020.