The Coronavirus pandemic has led to widespread economic uncertainty, presenting millions of Americans with unforeseen financial challenges.
For Americans who have lost their jobs, been furloughed, or experienced a pay cut during the Covid-19 pandemic, lenders and creditors are offering a multitude of debt repayment options. One of your choices may be forbearance (sometimes referred to as deferred payments.) But be sure you know all the facts before you sign up.
What Is a Mortgage Forbearance?
Mortgage forbearance is an option many mortgage lenders provide for borrowers facing temporary financial hardships. When the borrower’s circumstances threaten to lead to missed mortgage payments, it can help prevent foreclosure—a costly process for borrowers and lenders alike. Under a forbearance agreement, the lender agrees to accept reduced payments or no payments at all for up to 12 months. At the end of the forbearance period, the borrower must resume regular payments and repay the amount they were excused from paying during the forbearance period, with interest and possible fees. Repayment can be made as a lump sum, or in up to 12 installments, which are added to regular monthly payments.
When a mortgage borrower seeks forbearance, the lender typically requires proof of financial hardship, evidence that the hardship is temporary, and assurances that the borrower will be able to resume payments and repay all missed payments, plus interest, at the end of the forbearance period. (Payment deferment is not typically an option with mortgage loans.)
Not all borrowers qualify for traditional mortgage forbearance. Crucially, you can’t just miss a payment and expect no repercussions without communicating with your lender about your situation. You’ll need to work out a deal with your lender before stopping payment — otherwise, your credit standing could be compromised. If you know you are going to miss mortgage payments, look into forbearance—but also consider other possible options for avoiding foreclosure, including selling the home or:
- Refinancing your loan
- Mortgage modification
- Debt management programs
- Debt settlement
- Forfeiting your deed in lieu of foreclosure
All of these options, except selling your home before you miss a mortgage payment, will be recorded in your credit reports and will likely have negative consequences for your credit scores—unless you are requesting forbearance due to the coronavirus crisis. As part of the recently enacted Coronavirus Aid, Relief and Economic Security (CARES) Act, mortgage accounts in forbearance as a result of COVID-19 cannot be reported negatively to the credit bureaus by lenders.
While forbearance may allow you to deal with your short-term financial challenges and help you get back on your feet without jeopardizing your credit rating or credit scores, it doesn’t come without its drawbacks. If you enter into a forbearance agreement, you’re not getting “free money.” Depending on the repayment plan you agree to with your lender or creditor, you may need to repay the interest that accrues during your approved deferral period, and late fees may still apply. Ask your lender if you’ll still be charged late fees, how and when those fees will be applied and how your forbearance agreement will be reported to the national credit bureaus.
COVID-19 Forbearance and Loan Relief Programs
If you’re facing financial hardship related to the COVID-19 pandemic, it’s worth investigating relief programs your creditors may have available. Many loan company’s websites have been updated with information on how to seek payment forbearance or deferment. Many of the programs are also overwhelmed with requests, so be prepared to be patient and persistent. These programs are not activated automatically, so you must be proactive and contact your lender to apply.
Federal relief provided for in the CARES Act calls for lenders to be flexible with mortgage borrowers, automatically granting payment forbearance of up to 90 days for all who request it and not reporting negatively to the credit bureaus. It also requires lenders to work with borrowers after that period to work out repayment schedules or modify mortgage loans as needed, with the goal of keeping them in their homes. The CARES Act also suspends all foreclosure actions until at least May 30, 2020.
Other federal agencies have also announced pandemic relief programs, including the following:
- If your mortgage is one of the 95% of American single-family home loans backed by Fannie Mae or Freddie Mac, you may qualify for mortgage forbearance up to 12 months, after which your lender must work with you in an effort to come up with a manageable repayment plan (including possible modification of your original loan agreement).
Ginnie Mae, the federally backed agency that owns the bulk of the mortgages known as FHA loans issued to first-time homebuyers, as well as USDA loans issued to qualifying low-income buyers, has announced financial assistance for lenders, to support them as they extend forbearance to their borrowers. If your mortgage is one of these types of loans, contact your lender directly to learn about relief options.
- The U.S Department of Veterans Affairs (VA) is directing lenders who issue VA-backed mortgages known as VA Loans to be flexible with borrowers facing COVID-19-related financial hardships. If you have a VA loan, you should contact your lender directly to learn about forbearance options.
- In connection with the COVID-19 pandemic, payments on all federally backed student loans have been suspended until Sept. 30, 2020. Borrowers should monitor the Department of Education website for updates and information on any other relief programs that may be in development. Enrolled students should contact their schools to learn about additional relief programs or tuition refunds that may be forthcoming as a result of the pandemic.