What is a mortgage forbearance, and what is it not?
To protect homeowners from the Coronavirus hardship the United States government came up with the CARES Act, which includes six months of forbearance for a government-backed mortgage loans, which is extendable by another 180 days.
As of June 3, 2020, 4.37 million or nine percent of all mortgages are in forbearance, which translates to one trillion dollars in unpaid principal. In April 2020, 46% of borrowers using the mortgage bailout kept up with the payment, this number dropped to 22% in May.
Forbearance kicks in when your mortgage servicer or lender allows you to pause, or reduce your mortgage payments for a limited time. It is not loan forgiveness, and borrowers are going to be held responsible for the principal and accumulated interest during the period, which they have to pay later.
Borrowers should contact their mortgage servicer for the approval of forbearance, which can be done quickly.
They also should inquire about what options are available to help temporarily reduce or suspend their payments. Are there loan modification, or other options applicable to your situation? Can you waive late fees on my mortgage account?
Mortgage bailout affects about seven out of ten mortgage loans in the US, which are backed by Fannie Mae, Freddie Mac, USDA, FHA, and VA loans.
The CARES Act did NOT include Jumbo Loans, and borrowers are at their mortgage servicer’s mercy. However, banks know how bad things are and may work with the borrower.
Who pays for the forbearance?
The mortgage servicer has to pay principal, interest, property tax, and insurance on behalf of the borrower for four months, the government pays the rest. Banks and mortgage servicers don’t like this a bit, even though they have gotten tens of billions of dollars to cover the cost. So they have tightened their requirements for new mortgages to make sure that borrowers do not stop paying their mortgage payments immediately after loan approval; we will discuss this more in the next blog post.
While troubles arising from Covid-19 have forced many to use the mortgage bailout, according to one mortgage servicer, 7 out of 10 of their applicants didn’t have to use it. So let’s discuss the pros and cons of using this type of mortgage relief.
Disadvantages of forbearance
Borrowers using forbearance can’t refinance or buy another property until three months after becoming current on the mortgage.
Is a forbearance terrible for your credit? The CARE Act prohibits any derogatory info on your credit records. But on the other hand, when credit rating agencies do not get any information on your mortgage payments, they may wonder about it, and your credit rating may suffer. If you miss a mortgage payment before the approval, your credit will be negatively affected.
How can borrowers become current on their mortgage?
At the end of the forbearance period, your options could include paying all of your missed payments at one time, spreading it out over months, or added as additional payments or a lump sum at the end of your mortgage. This depends on your lender.
Borrowers could get a loan modification as well. Options may include extending the term of your loan, lowering your rate, or reducing your principal balance.
The real disadvantage of the mortgage bailout is that borrowers pay interest on the interest. Keep in mind that the vast majority of the payment goes towards the interest in the first few years of the mortgage loan.