The Covid-19 pandemic has brought about hard times and much panic and uncertainty. The term forbearance is being bandied about a lot, so in this article, we provide information on how homeowners can benefit from forbearance and the CARES Act.
The CARES Act
The coronavirus outbreak has caused business shutdowns and job losses for millions of Americans. Therefore, the Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) have advised mortgage servicers and lenders to offer forbearance options to homeowners who are currently facing financial difficulty.
The CARES (Coronavirus Aid, Relief and Economic Security) Act is a $2 trillion federal plan that was authorized by Congress and offers assistance to around 70% of people with property mortgages. This Act prohibits foreclosures on homes during this difficult period (for those with government-backed mortgages).
Homeowners with federal-backed mortgages who are unable to pay their monthly mortgage installments because of the pandemic are eligible to benefit from the CARES Act as well.
Details about Forbearance
Forbearance does not give you free funds. It is simply a temporary halt of payments. You can delay your mortgage payments until your financial situation improves. Currently, the law permits forbearance for 180 days and you can renew it for another period of 180 days. During this time, your lender cannot add any additional interest, fees, or penalties to your currently scheduled monthly installment payments, but your regular interest will continue to accrue.
Eligibility for Forbearance
To be eligible for forbearance under the CARES Act, you must have a mortgage supported by the U.S. Department of Housing and Urban Development, the U.S. Department of Veterans Affairs, the Federal Housing Administration, the U.S. Department of Agriculture, Freddie Mac or Fannie Mae.
Find out from your servicer if your mortgage is government supported or not. You can also use online search tools to learn this information. About 50% of all mortgages in the U.S. are backed or owned by either Freddie Mac or Fannie Mae. Get your servicer to provide all the rules of your forbearance contract in writing. Your agreement terms are important to know regarding payments after the forbearance period.
If you opt to use the forbearance plan to delay your home loan payments, what happens next? After the forbearance period ends, you’d need to start paying your monthly installments again. You’d need to pay back the amount that you had paused. Ask your servicer for options like making added payments to your mortgage end, making a one-time payment for all missed installments or modifying your loan.
Select from the following repayment options:
Loan modification: You can extend your mortgage payment term. For instance, if you have 24 years’ payment remaining on a 30-year home loan, and you did not make payments for six months, you can extend your loan term to 24 years and six months.
Lump-sum loan payment: If you pay $1,200 as a monthly loan payment and you postponed your payments for six months, you’d owe $7,200 after the forbearance period ends, plus your normal monthly installment of $1,200. That makes it $8,400 as a one-time payment. Can you afford it? A lot of consumers will not be able to. The good news is that for mortgages with Freddie Mac or Fannie Mae, you will not be asked to make a lump-sum payment.
Short-term repayment plan: If you opt to add payments to your mortgage end, you’d be able to spread the $7,200 across 12 monthly installments, while paying your standard $1,200 per month. This means you’d need to pay $1,800 per month over the next year.
We advise you to get professional advice to check your best options for home loan forbearance.
Be Careful of Scams
You should be careful about sharing your information, since many “mortgage rescue” frauds have been reported. Scammers pretend to be attorneys or lenders and target homeowners who are having difficulty with their finances. If a scammer has duped you, contact an attorney immediately for assistance. Remember that you should make your payments only to your mortgage provider and not anyone else.
Find out the needed information about your required loan repayment plan so you can make an educated decision. Perform thorough research to understand what you’d need to repay – an amortized plan or a single lump sum. Would you be able to meet that agreement after regaining your financial health?
If you have the means to make timely mortgage payments, go ahead and do it. But if you can pay only a part of your loan or not at all, inform your mortgage provider immediately. If you get back your income while using a forbearance plan, resume your payments as quickly as possible and get off the forbearance program.