Suddenly out of work or making due with reduced paychecks, an estimated 4.1 million Americans have sought forbearance on their mortgage, according to data released Monday by the Mortgage Bankers Association. That's a staggering number, and experts anticipate more homeowners will seek this protection as the economic impact of the coronavirus wears on.
A forbearance hits the pause button on mortgage payments. As part of its massive economic rescue package for the economy, Congress made it easier for homeowners to enter a forbearance plan and regain their financial footing.
Still, there are considerations for homeowners. Eventually the money must be paid, and homeowners with federally back loans have some advantages over those with private mortgages.
Here’s what they should know:
HOW DO I OBTAIN A FORBEARANCE?
If you feel forbearance is your best option, you need to know which company services your loan and which company owns it. They're not always one and the same.
The servicer is the company you make your payment to and get monthly statements from. You can typically find information on forbearance at the servicer’s website and can start the process there. If necessary, you can look up your servicer by searching the Mortgage Electronic Registration Systems website.
Who owns the loan plays a role in what relief options are available to you.
About 70% of all mortgages are federally backed, according to the Urban Institute. That includes loans through the U.S. Department of Agriculture, Federal Housing Authority, the Veteran’s Administration, as well as those held by organizations such as Fannie Mae and Freddie Mac. The remainder have mortgages held by banks or other private investors.
You can often find this information online, on your statement or by calling your servicer, which must provide you the information they have on file.
The Consumer Financial Protection Bureau has useful tips on its website determining who owns your loan and seeking forbearance. Fannie Mae and Freddie Mac also have their own lookup tools to determine if they back your loan.
WHAT HAPPENS DURING A FORBEARANCE?
Forbearance allows homeowners to suspend mortgage payments for a designated period of time. The payments aren’t forgiven; they must be repaid later. Some servicers may also offer a reduced payment during this period instead.
Under the government's economic rescue law, people who have a federally backed mortgage and are facing financial hardship due to the pandemic are given the right to a forbearance for up to one year. An individual can request a 180 day forbearance but that can be renewed. Andrea Bopp Stark, an attorney at the National Consumer Law Center, says many borrowers are being put into 90 day forbearance but they have a right to extend that.
No additional fees, penalties or additional interest can be added to the account.
People with privately held loans don't have the same protections. They may face different relief periods and repayment options. They need to be aware of what's being offered — specifically when the balance must be repaid and if they can manage the payments. In some cases, interest will continue to accrue on privately held loans while payments are reduced or suspended.
The CFPB and other financial regulators have encouraged financial institutions to work with borrowers facing financial difficulty because of coronavirus. Talk to your servicer about your options or check with your state housing authority to see if there are any additional protections or aid in place to help.
Any borrower should also be clear on who is responsible for payments that might typically go to an escrow account — such as those for homeowners insurance or taxes. If not covered by the servicer, the homeowner should continue those payments.
WHAT HAPPENS WHEN FORBEARANCE ENDS?
Homeowners with federally backed loans won't have to pay back those missed payments all at once. They can spread them out over time, tack them on to the end of the loan or make a lump sum payment at the end of their mortgage.
Fannie and Freddie announced last week that borrowers who go into forbearance and return to making normal monthly mortgage payments can opt to repay those missed payments when the home is sold or refinanced.
People with privately held loans must work out the best available option with their servicer. In some cases the loan may be extended or repayments spread over time, but some may face one large payment when the forbearance period is over.
WHAT ELSE DO I NEED TO KNOW?
While forbearance would typically hurt your credit score, the credit of homeowners who sought protection because of the pandemic is not affected.
A forbearance is certainly a better option than defaulting on a loan, which comes with significant added costs and would likely lead to foreclosure, as well as damaging a homeowner’s credit.
If you run into problems along the way, find a certified housing counselor through the Department of Housing and Urban Development. The counselors offer their services free of charge. If you run into problems with your servicer, you can file a complaint with the CFPB or reach out to your state’s attorney general for help.