Do you own your home? Are you having trouble paying your mortgage payment? You may be a good candidate for mortgage forbearance or mortgage deferment.
In late February to early March 2020, the COVID19 virus started to sweep the world. One day you might have had your job and the next day, you were laid off for an indefinite period of time. It was a shock for us all.
Maybe you’ve already missed a mortgage payment or maybe you were already struggling with your mortgage payments for reasons that had nothing to do with COVID19. If you’re worried about your mortgage payments, Reali Loans will walk you through your options.
You don’t have to lose your home.
What’s Ahead:
What is mortgage forbearance?
You suspend your payments for a period of time
In a general sense, mortgage forbearance is for homeowners who are either delinquent on their mortgage payments or know they are going to be delinquent in the future due to a temporary hardship. That hardship could be for financial or medical reasons. Usually, your loan payments, under forbearance, are either reduced or suspended for a predetermined period of time.
Your mortgage lender agrees not to foreclose on your home for that predetermined time period. It can be for a few months or up to a year depending on the terms of your agreement. If your financial hardship isn’t resolved at the end of this time period, some lenders may extend it.
You will need to repay missed payments
Each lender has their own terms for mortgage forbearance. You will sign an agreement that will state your obligations under the forbearance agreement. Read the agreement carefully and be sure you can repay the payments you miss on the schedule the lender specifies. Most lenders are willing to negotiate with you.
Forbearance is only for certain situations
Mortgage forbearance is a temporary solution that you can use if you can’t pay your mortgage payments due to a medical emergency, financial hardship, or natural disaster. If there is some other reason that you are finding it difficult to pay your mortgage payments, such as an interest rate that is too high or payments that are too big, then you need to negotiate some other type of mortgage loan with your lender.
Mortgage forbearance will help protect your credit since your mortgage lender has agreed that you will miss a certain number of mortgage payments. If you have a forbearance agreement, the lender is not obligated to report it to the credit bureaus. If they do report it, it will not be viewed as negatively as a foreclosure or skipping mortgage payments.
What is mortgage deferment?
You pay back the money at the end of your mortgage loan
Mortgage deferment is slightly different from mortgage forbearance. If your mortgage loan lender allows you to defer your mortgage payments for a period of time, the deferred payments are typically added on to the end of the mortgage loan, not to the end of the deferment period as they are with forbearance.
You’ll still collect interest
At the end of the loan, the lender will either set up a payment plan with you or require that the deferred payments be repaid in a lump sum. If your mortgage is deferred, interest is still accruing. You will be responsible for both principal and interest at the end of the loan time period. Due to the COVID19 crisis, mortgage forbearance plans are often offering the same type of payment plans.
The term “mortgage deferment” is actually seldom used. You hear “deferment” used more often with regard to student loans. With mortgages, the only difference in forbearance and deferment is at the end of the period when your mortgage payments are delayed.
Qualifying for forbearance and deferment
The terms mortgage forbearance and mortgage deferment are often used interchangeably, as they do have the same qualifiers. In order to qualify for these programs:
- the home must be your principal residence.
- You can’t vacate the home permanently.
- You must have a certain expense-to-income ratio stated by the bank.
- Your monthly expenses must be a certain percentage of your monthly income.
The eligibility period for a forbearance or deferment is usually not more than one year, although it may be longer due to COVID19. It is determined by the lender.
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When the COVID19 virus swept the world, people all over the world found themselves without jobs as countries shut down their businesses to try to halt the spread of the viruses. In the U.S. alone, all the job gains since the Great Recession of 2008 have been wiped out. Challenger, Gray, and Christmas, a global outplacement firm, estimates that nine million jobs will be lost in the U.S. alone. The United Nations’ International Labor Organization estimates almost 25 million jobs will be lost globally.
The U.S. Congress passed the CARES Act, the Coronavirus Aid, Relief, and Economic Security Act to address the needs of Americans in the face of COVID19.
If you have a COVID19-related financial hardship and you can’t pay the mortgage payment on your home, contact the service provider for your mortgage as soon as possible. This is generally the company to which you make your payment each month.
You will automatically qualify for a 180-day forbearance on your home loan. All you have to do is talk to the customer service representative handling COVID19-related mortgage issues and this forbearance will be automatically granted to you. If your financial hardship extends beyond the initial 180 days, you may be granted another 180 days. Keep in close touch with your mortgage service provider throughout this process.
If your mortgage is federally insured, the CARES Act of 2020 makes mortgage forbearance automatic. If it is not federally insured, contact your service provider anyway. There may be mortgage relief options available to you.
When signing a forbearance contract, be sure and take notice if the contract requires payment at the end of the forbearance period or at the end of the mortgage. If payment is due at the end of the forbearance period, it will be as a lump sum. If it is due at the end of the mortgage, it may be spread out over the life of the mortgage. These are terms that should be discussed with the mortgage loan officer.
In no case, should any extra interest or penalties be charged to you due to the COVID19 pandemic financial hardship. This is specified by the CARES Act of 2020.
The CARES Act has a provision that stops all proceedings on foreclosure on a home for 60 days forward from March 18, 2020.
Federally-backed mortgages and mortgage loan forbearance
Federal Housing Administration (FHA) mortgage loans and Veterans Administration (VA) mortgage loans are federally-backed loans administered by the Department of Housing and Urban Development. United States Department of Agriculture loans (USDA) loans are federally insured by the U.S. Department of Agriculture. Mortgage loans that are backed by these federal agencies are insured against default by the borrower. The lending institution will recover its money if the borrower does not make good on the loan.
Terms that are more favorable to lower-income individuals and families are usually available through loans backed by these federal agencies such as lower down payments. If you cannot make your mortgage payment on a federally-backed mortgage loan due to a job layoff or other circumstance resulting from the COVID19 virus, the CARES Act of 2020 will help you. The chances are good that you do have a federally-backed loan. The Urban Institute, a non-profit research institute, estimates that around 70% of all mortgage loans in the U.S. are federally insured.
The CARES Act will protect you in two ways. First, if you are facing foreclosure due to COVID19 or if your foreclosure proceedings are scheduled in the near future, the CARES Act will help you. If you have a federally backed mortgage, the CARES Act puts a moratorium on foreclosure on your home from March 18, 2020 forward for 60 days. The lender cannot begin a foreclosure proceeding against you, or finalize a foreclosure already in progress, during this time period.
Second, if you have a federally backed mortgage, the CARES Act provides for you to ask your lender for forbearance if you have a financial hardship due to COVID19. They will grant it for 180 days. If you need an extension for another 180 days (one year total), your lender will grant that also as long as you can show your financial hardship. You have to reach out to your lender and the servicer of your loan every 90 days to get a renewal.
Federal credit unions are also under much the same guidelines as large federal banks, so if you have a mortgage through a credit union, you should be all set, too.
Conventional loans and mortgage loan forbearance
The Federal Housing Finance Agency (FHFA) dictates guidelines for conventional mortgage loans which are administered by Fannie Mae and Freddie Mac, two agencies that buy conventional mortgages. If you are in financial hardship due to the COVID19 virus, talk with your mortgage lender. If you agree on an assistance package, you could receive any or all of these benefits:
- Mortgage forbearance may be available for a 12-month period or possibly longer.
- Penalties and late fees may be waived.
- There will be no negative reporting to the credit bureaus.
- Loan modification may be available when the economy normalizes.
Financial regulators have encouraged mortgage loan providers to work with clients who have lost their jobs and have mortgage loans that are not federally backed in order to prevent them from losing their homes. It’s possible you could also work out a payment plan at the end of the forbearance period with your loan provider.
You can use this free tool to help you generate a hardship letter to your lender which should be your first step in applying for mortgage relief. You should also contact your individual state government to see if they have any options for you.
Summary
Mortgage forbearance is a tool used by financial institutions to assist customers who are under a financial, medical, or another type of hardship and can’t pay their mortgage payments for a time. Deferment is often used interchangeably with the word “forbearance,” although it is actually a separate program that defers mortgage payments until the end of the loan.
Forbearance has come to the forefront of the mortgage industry since the COVID19 crisis as the tool banks are using to help their newly-unemployed customers who would otherwise lose their homes. It has become widespread since the CARES Act of 2020 was signed into law.
The CARES Act addresses federally-insured mortgages which are most of the mortgages in the U.S. today. Banks who make conventional loans also are trying to help their mortgage customers by offering similar types of mortgage relief due to COVID19.
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