The information provided is merely for educational and informational purposes. It is not intended as a substitute for professional advice. Should you decide to act upon any information provided in this writing, you do so at your own risk. While the information in this writing has been verified to the best of our abilities, we cannot guarantee that there are no mistakes, errors or that the information is the most up to date.
While we all continue to face challenges caused by COVID-19, some in our communities have been affected worse than others. Many owners and employees of businesses that have reduced business hours, temporarily closed or even shut their doors for good are facing financial pressures that would have seemed unthinkable just mere months ago.
It’s a harsh reality. But if you’re worried about paying your mortgage, you have options at your disposal. There’s not a one size fits all solution, so the Q&A below was designed to help answer questions you may have.
While we can’t address every option that may be available to every client, these are some of the most common options your loan servicer may offer.
- Forbearance. This option is discussed in detail below and currently seems to be the first option that loan servicers are pushing. However, it may not be the best for all borrowers.
- Loan Modification. This option would change the terms of your loan, perhaps even lowering your monthly payment. Or your loan could be re-calculated, and the arrears added to the loan balance, which might make your monthly payments go up.
- Repayment Plan. You would be allowed to spread out your past-due payments. The repayments would be added to your current mortgage balance.
- Loan Extension. Your delinquent balance would be added to the back end of your loan. The past-due payments would effectively extend the term of your loan.
If you’ve lost your job or been furloughed due to COVID-19, your first step is going to be reaching out to your loan servicer, the company you pay when you send your mortgage payment. Forbearance currently seems to be the most frequently offered option and also the most misunderstood.
KNOW ALL THE FACTS BEFORE YOU AGREE TO ANYTHING
Q. What is a mortgage forbearance?
A. Forbearance is when a lender allows a borrower to temporarily stop or suspend payments on a long for a set period, without the lender starting the foreclosure process. Forbearance is NOT loan forgiveness; it is putting off payment until a set later date. A forbearance agreement allows a borrower to pause or reduce payments for a period without the lender starting the foreclosure process. In return, the borrower agrees to resume payments when the time is up and pay the additional deferred amount, including principal and interest, to bring the account into good standing.
Q. Does every mortgage forbearance have the same terms?
A. No. Every lender, every type of loan and every borrower can have different terms. Never assume anything. Make sure you understand fully what the terms are. You and your lender determine if you qualify for forbearance, how long the forbearance period will be, how much your payment will be reduced, and how much you will repay the lender. You may have to repay the lender at a higher interest rate, but forbearance can help you avoid foreclosure on your home. It can also save your credit score. Once the forbearance ends, you must repay the principal, interest, in addition to possibly taxes and insurance according to your forbearance agreement. If, however you are unable to fulfill the terms of the forbearance, you may have simply delayed foreclosure on your home.
Q. Is there anything unusual that is available for forbearances done under the CARES act?
A. When you ask for forbearance, determine whether late fees and interest will accrue during the forbearance period. If your forbearance is under the CARES Act on a federally backed mortgage, fees and additional interest cannot accrue. To qualify for the forbearance, your loan must be federally-owned or backed by one of these federal agencies or entities: Fannie Mae, Freddie Mac, Department of Housing and Urban Development (HUD), Federal Housing Administration (FHA), Department of Agriculture (USDA direct and guaranteed loans) or Department of Veterans Affairs (VA loans).
Q. What if I cannot make my mortgage payment, but I have a mortgage that is not covered by the Cares Act because the loan is not backed by the federal government?
A. You will need to visit with your servicer as the investors who own these mortgages get to set the terms of any assistance.
Q. If I am struggling to make my payments, is forbearance the answer?
A. Not necessarily. Visit with your loan servicer about all options available to you and research them before committing to anything.
Q. Should I continue paying the interest portion of my payment, even if I receive a forbearance?
A. If you are able, you should pay the interest that accrues on your debt during the forbearance period. If you don’t, the interest is added to the principal of the loan and the total interest paid over the life of the loan becomes larger.
Q. Is forbearance a long-term solution?
A. Yes and no. Forbearance is a temporary solution in that you don’t immediately have to make your payments. If you can meet the terms of the forbearance, it can be a long-term solution. If you are unable to meet the terms, you may have created a long-term disaster. Securing relief now could come back to haunt you later. Your bank still expects payment at some point, and it may even require a lump sum at the break’s end. For example: If you can’t pay one month now, it is hard to see how you might pay four months-worth of your mortgage payments in one balloon payment later.
Q. What happens if I pay my taxes and insurance through an escrow account associated with my mortgage?
A. This is a conversation you must have with your servicer. You will want to make sure you understand if you will still need to pay that portion of your payment to the servicer during the forbearance or how that will be handled. If this lender indicates that the servicer will pay them on your behalf, make sure it won’t be paid through force-placed insurance as that is not a desirable option. Force placed insurance is extremely expensive and it benefits only the lender, not you the mortgagor.
Q. What happens if I already pay my taxes, insurance or condo fees directly and they are not escrowed?
A. Those expenses are not included in the forbearance. Continue to pay them or make other payment arrangements.
Q. What do I do if I don’t find the terms of the forbearance acceptable?
A. Above all, don’t sign and commit yourself to something until you are COMPLETELY comfortable. Visit with your loan servicer about the option to pay extra each month until the deferred amount is repaid or add the suspended payments to the end of the loan. Another option is to apply for a loan modification, in which the loan company might add the deferred amount to the balance, increase the length of your loan or reduce the interest rate.
Q. What do I do if I get near the end of the forbearance and I am still struggling and fear I cannot make a hefty lump-sum payment?
A. Communication with your loan servicer is crucial. Negotiate your options. In addition to the items mentioned above: loan modification, a repayment plan, or a loan extension; there may be other options available to you that would make good financial sense. Besides your loan servicer, your accountant, personal banker, or financial planner are good resources to use when deciding.