In 2020, many are facing financial hardship.  Due to this, mortgage forbearance is a term that seems to be getting thrown around a lot. But what is it and who is it for? Mortgage forbearance in its simplest explanation is a temporary reduction or pause on monthly mortgage loan payments. Traditionally, mortgage forbearance has been an option for relief during financial hardships. These hardships may include temporary unemployment and illness or injury.  It may also be an option when your home is damaged due to a natural disaster, etc.  Detailed documentation of these financial hardships is typically required for forbearance on mortgages not covered under the CARES Act. The CARES Act signed into law in March of this year provided certain protections for some borrowers during the coronavirus pandemic. However, there are still risks associated with mortgage forbearance.

CARES Act and Mortgage Forbearance

The CARES Act initially granted a 180 day mortgage forbearance with provisions that allow for extensions of up to 360 days.  However, this is only for homeowners with mortgages backed by the federal government. Mortgages backed by the federal government are not just limited to FHA and VA loans. Federally backed mortgages also include those underwritten according to Freddie Mac and Fannie Mae guidelines, as well as others. If you are unsure if your mortgage is backed by the federal government your loan provider will have the answer. 

It is vital that you understand what happens at the end of your mortgage forbearance term. Traditionally, those who use mortgage forbearance for financial relief have three primary options for repayment at the end of their forbearance term.

1. Lump Sum Payment: Under this agreement 100% of your mortgage payments due during your mortgage forbearance are owed in a lump sum. Fees and Interest may also be applied in addition to this amount. For example, if your mortgage payment is typically $1,000 per month and you went into forbearance for 6 months. At the end of that 6 months you would immediately owe $6,000 plus any fees and interest. 

2. Repayment Plan: Simply  put,  any mortgage payments owed during the mortgage forbearance period are due in installments after after the forbearance ends. Typically, installments are for a term no greater than 12 months. The length of your repayment term is based upon your ability to pay and is negotiated with your lender.

3. Mortgage Modification: With this repayment option the payments missed during forbearance are written into the back end of your loan. An example is if you have 10 years left on your mortgage and you were in forbearance for 6 months. In this instance, your mortgage would be rewritten to be 10 years and 6 months. 

The Cares Act requires payment options outside of the lump sum payment. Will larger monthly mortgage payments be affordable at the end of the pandemic?

It also made attaining mortgage forbearance easier.  The CARES Act stipulates that during this time documentation of financial hardship doesn’t need to be provided. Simply notify your lender that you are unable to pay your mortgage due to the current health crisis. Furthermore, under this new law, no penalties, interest, or fees can not be tacked on to your repayment. 

Will Mortgage Forbearance Impact My Credit?

Mortgage forbearances not safeguarded by the CARES Act are reported to the credit bureaus. A credit advisor can help you determine whether or not that is better than having a reported missed payment. Under the CARES Act your credit is afforded more protections than with a traditional forbearance. If you apply for a mortgage forbearance due to the pandemic, it will not negatively impact your credit score.  

Bottomline

Although the CARES Act made forbearance more easily attained and easier to repay it did not erase all risk. It is important to realize that with mortgage forbearance the balance of your loan does not decline. That money is still owed.  At some point the amounts that would have been due during your forbearance term must be paid.  Because of this, mortgage forbearance is not for everyone. Mortgage forbearance is not payment forgiveness and should only be applied as a last resort. Refinancing your mortgage to take advantage of record breaking low interest rates or selling your home may be better options. It is important to speak with your lender and your mortgage broker to figure out what is best for you. Consider your other options before requesting a mortgage forbearance.