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With more than 20 million jobs lost in April and an estimated four million homeowners now in mortgage forbearance, the coronavirus pandemic continues to take its toll on the United States economy. While coronavirus mortgage relief can be a valuable lifeline during uncertain financial times, it is critical that consumers understand what they’re signing up for before agreeing to forbearance terms.
We’re sharing what homeowners need to know about coronavirus mortgage relief, from eligibility to possible downsides. For an inside perspective, we also spoke with a mortgage professional with more than 16 years of industry experience to learn his best advice.
Who is eligible for coronavirus mortgage relief?
Signed into action on March 27, 2020, a provision of the CARES (Coronavirus Aid, Relief, and Economic Security) Act allows for up to 12 months of payment suspension on federally backed mortgages.
To understand what a federally backed mortgage is (also referred to as government-owned mortgages) and how to know if you have one, here’s a quick Mortgages 101 refresher:
You’ve probably heard the names Fannie Mae and Freddie Mac. Created by the U.S. Congress, these are both institutions that guarantee certain mortgages purchased from the secondary mortgage market. Mortgages included under this umbrella are indeed government-backed.
Remember when you first started the homebuying process and applied for your mortgage with, let’s say, Mr. Bob at Very Good Mortgage Company? After Bob, your mortgage originator, helped you through the process and you closed on your home, it wasn’t long until you received notice that you’d be making your payments to a different company; we’ll call this one Excellent Mortgage Services.
This entity is now your loan servicer — responsible for collecting your payments, handling your escrow account, and answering your calls with questions if something looks strange on your mortgage statements.
After receiving your payment each month, Excellent Mortgage Services then turns around and pays either Fannie Mae or Freddie Mac, who ultimately hold the mortgage (called a mortgage note) on your home.
Most mortgages in the United States are federally backed, but if you’re not sure whether yours is, you can either call your servicer and ask directly, or you can use this loan look-up tool.
If your mortgage is not owned by Fannie or Freddie, you can still contact your lender to explain your hardship and explore relief options. Many lenders are willing to negotiate right now as the effects of the coronavirus are so widespread.
If you’re renting, you’re protected from eviction for 90 days if you can’t pay rent due to coronavirus.
What exactly is ‘forbearance,’ and how do consumers take advantage?
Put simply, forbearance is a temporary suspension of payments. Under more conventional circumstances, you would negotiate the terms and conditions of a forbearance arrangement with your mortgage service provider on a case-by-case basis, often as a strategy to help avoid foreclosure.
When it comes to forbearance in the time of coronavirus, the process is much simpler because the option is now widely available. Logging into your mortgage servicing account online will likely show links to relief options, or you may have already received an email, letter, or even a phone call from your servicer to make you aware of the forbearance option.
Forbearance under the CARES Act does not require proof of hardship, and there are no fees or penalties, nor is there an impact to your credit. You should receive at least 90 days of forbearance upon initial request, with further extensions available up to 12 months.
What should homeowners be aware of before requesting forbearance?
“I feel like this is one of those times where clichés are clichés for a reason,” says Clint Hammond, branch manager of Mortgage Network in Columbia, South Carolina. “There’s no such thing as a free lunch.”
With nearly two decades of experience in the mortgage business, Hammond has seen how loan assistance programs can actually end up harming the consumer in the long run.
In terms of forbearance, remember, you will only be postponing your payments, not eliminating them. Any payment you do not make during this period will have to be repaid at a later date.
An additional point of particular concern, in addition to your deferred principal payment, is the escrow account, wherein a portion of your monthly mortgage payment is set aside for yearly property taxes and homeowners insurance premiums.
“If you skip three mortgage payments, you’re going to be three payments short into escrow,” says Hammond. “That’s going to have to be made up somehow.” The day the taxes and insurance are due does not change, so those payments will need to be made even if you are on forbearance.
This could potentially come in the form of a balloon payment, where you may owe the missing amount of escrow contribution in one lump sum when you start repaying your mortgage.
“Or, your servicer may just cut a check for the taxes and insurance like normal, leaving you with an escrow deficiency balance,” warns Hammond. “Then, when your next escrow audit happens, your monthly payment will increase to make up for that deficiency, and the increase could be significant — which could be harmful.”
Homeowners should also be aware that, while going into forbearance due to coronavirus will not harm your credit, it will make you ineligible for refinancing or taking out a new mortgage for one year after you resume payments. (Editor’s note: As of May 19, this restriction was changed from one year to three months.)
If you’re not considering refinancing and have no plans to move, this may not seem like a big deal, but being aware of the restriction is important — especially as we’ve all just had a major reminder of how unpredictable life can be.
“I had a borrower call me in the first week of May; they were looking to purchase a home,” recalls Hammond. Per his usual process, he gathered their information and sat down to get to work. Upon pulling credit, Hammond saw that their existing mortgage was in forbearance.
“I called her back and said, ‘You didn’t tell me you’re in forbearance,’ and she said, ‘I just did it yesterday.’ [The lender] wasted no time getting that onto their credit.”
In Hammond’s experience, the normal update to a consumer’s credit history would be when lenders report to credit bureaus once a month. This time, it happened within 24 hours.
“I said to her, ‘Let me get this straight: You have not yet missed a payment?’ and she confirmed that was correct, so I asked if they needed [forbearance] and she said, ‘No, we just took it because it was offered to us. We just figured, let’s not make these payments and save up for when we buy.’”
Hammond advised that his borrower call her mortgage servicer back, take the loan out of forbearance, and make their May payment as soon as possible. Fortunately, she was able to do so and her next mortgage application will be able to move forward.
“But what if she hadn’t called me until June? We’d be in a bit of a pickle at that point.”
Understand what you’re getting into
As with most big decisions, it’s important to do your homework before signing on the dotted line to accept a forbearance period. The coronavirus mortgage relief process will vary between lenders and loan types, and your individual needs will differ from those of another homeowner, so the most valuable thing you can do for yourself is ensure that you thoroughly understand the would-be terms of your forbearance.
Read the fine print, and don’t be afraid to ask questions when talking to your loan provider. A few good ones to keep in mind:
- How long is my initial forbearance period? How will the deferred payments be handled at the end of the period? Will my entire payment be readjusted?
- How will I make up my escrow deficiency?
- How much would my escrow balloon payment be?
- How much would my monthly payment increase?
- Can I choose to pay toward my escrow account each month while my mortgage is in forbearance?
- Can I stop forbearance at any time?
- How do I request an extension if needed?
Policies and guidelines are frequently updated as we collectively navigate this pandemic, so it’s important to regularly consult trusted resources. A few of our suggestions include:
- HomeLight’s own COVID-19 portal
- Mortgage News Daily
- The Consumer Financial Protection Bureau’s mortgage and housing assistance resources
- The Federal Housing Finance Agency’s COVID-19 resources
While Hammond advises his borrowers to only accept forbearance as an absolute last resort shy of financial ruin, he acknowledges the value of having the option available.
“There are going to be some cases where it is a very legitimate thing that someone absolutely should take advantage of. In uncertain times where your income has been reduced or completely eliminated, the ability to not make a couple of payments might be the difference in being able to make it through all of this as close to unscathed as possible.”
Header Image Source: (Teddy Guerrier / Unsplash)