Coronavirus Mortgage Relief: Is Mortgage Forbearance the Right Choice?

Robin Kocherhans Robin Kocherhans / Published Apr 27, 2020, 1:47 PM

Image of homes with text that reads Coronavirus Mortgage Relief: Is Mortgage Forbearance the Right Choice?

What is mortgage forbearance?

Mortgage forbearance is a type of mortgage relief that gives you a temporary break from your mortgage payments after an economic hardship.

Usually, this relief is done by either pausing your payments or reducing them for a short period of time.

Forbearance & the CARES Act

While mortgage forbearance may be an available option at any time, depending on your loan's servicer, the current focus on mortgage forbearance has come about because of the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act.

This act requires lenders to grant mortgage forbearance to any homeowner who requests it if they have a government-backed home loan. These include all VA, FHA, and USDA loans, as well as conventional loans that are backed by Fannie Mae or Freddie Mac.

The purpose of mortgage forbearance

Mortgage forbearance isn't meant to be used by anyone who doesn't need it. Basically, if you CAN pay your mortgage, then you should pay it. We'll get into this a little later, but if you request forbearance when you didn't actually need it, there could be legal consequences.

Mortgage forbearance vs. deferment

It's also important to understand how forbearance is different from a deferment of your mortgage payments. Typically deferment occurs when you refinance your home loan, and there is a waiting period of up to two months before your first payment on the new loan is due.

If you defer your mortgage payment, it doesn't accrue interest during that time, and you won't need to make catch up payments to your lender.

With mortgage forbearance, your loan will still accrue interest. Under the CARES Act, while this interest can't be above what it would be normally, it will still accrue. In addition, once your forbearance period ends, you will somehow have to catch up on all those payments you didn't make.

How do I qualify for CARES Act mortgage forbearance?

If you can pay your mortgage, PAY IT!

Who can qualify to receive mortgage forbearance under the CARES Act is very clearly defined by two main criteria:

  1. Facing a COVID-related financial hardship
  2. Your home loan is back by the federal government

Just a quick, but important note about the second point above, is that even if you don't have a government-backed loan, you may still be able to receive mortgage forbearance. Your servicer may still choose to offer it to you as an option. They just aren't required by law to offer it as part of the CARES Act.

How does mortgage forbearance work?

When you request mortgage forbearance, there are two main options for what that forbearance might look like. We've already mentioned them in passing but they are:

  1. To pause your payments completely
  2. Or to reduce them

When your payments are paused or suspended, the CARES Act allows it for an initial period of 180 days, which is equal to about 6 months. In addition, the act also allows for a one-time extension of another 180 days. So, under the law, you can pause your mortgage payments for up to a year.

By reducing your payments, you will still make partial monthly payments to your servicer. Again, these reduced payments can occur for up to 6 months initially and up to 12 months total.

Making catch-up payments

If you pause your payments for 6 months, that amount isn't forgiven, and it doesn't go away. The same is true for any partial payments you make. Whatever you didn't pay will still be owed to your loan's servicer.

There are three main options with how these catch-up payments might be structured.

Due all at once

Most commonly, after the mortgage forbearance period ends, many servicers will want those missed payments all at once and immediately. This can be a huge burden.

For example, let's say you have a $1,000 mortgage. You request an initial 6 month forbearance of your mortgage payment, and then when that period ends, you extend it by another 6 months as allowed by the CARES Act.

Paused Payments:
You were let go from your job, so you request forbearance for your total mortgage payment. Because you haven't paid your mortgage for 12 months, that means you owe $13,000 dollars in the 13th month: $12,000 of the paused payments and $1,000 for that month's payment. Ouch!
Partial Payments:
You're able to make some of your mortgage payment because your hours were only reduced, so you request forbearance for half of your mortgage payment ($500). That means that after 12 months, you’ve paid $6,000. In the 13th month, you would owe $7,000 total. Ouch again.

Due over a period of time

Some servicers may be willing to let you ease back into the payments instead of requiring a single lump sum. So, for example, they give you a year to catch-up on all those paused or reduced payments.

With this type of catch-up plan, you would have higher mortgage payments for whatever period of time you and your lender agree on. For this example, let's say they give you a year.

Paused Payments:
Instead of owing $13,000 in month 13, you would make a $2,000 monthly payment from month 13 through month 24. Not quite as bad, but still painful since it's doubled the amount you would normally pay. The good news is that in month 25, you'd go back to $1,000 payments.
Partial Payments:
You'd owe $1,500 each month for a year in order to catch up on the $6,000 you owe while you were under forbearance. Again, much less painful than $7,000 all at once, but it still has the potential to really affect your monthly budget for that year of higher payments.

Due at the end of your term

This third option is the most uncommon, but you may be able to request it from your servicer. With this repayment plan, you don't have to make any catch up payments. Instead, that year of missed or reduced payments would extend the term of your loan.

Paused Payments:
In month 13, you'd resume making just your normal $1,000 payment. But if your loan was supposed to be paid off after 30 years, you'd end up having a 31 year term where you continue making your $1,000 payment through the end.
Partial Payments:
With partial payments, your loan term would be extended by 6 months instead of a year, to a 30.5 year term. Again, you would maintain your normal $1,000/month payment through that 30.5 years.

Is mortgage forbearance a good idea?

Despite the future financial impact listed above, mortgage forbearance may still be the right choice for you. However, before you make that decision, you should understand the consequences, both good and bad, of requesting it.

Pros of mortgage forbearance

Some of the benefits of mortgage forbearance include:

  • Buying yourself more time to get back on your feet financially
  • Avoiding late fees & other penalties
  • Preserving your credit score by avoiding delinquency reports
  • Preventing foreclosure

Cons of mortgage forbearance

  • Doesn't erase what you owe
  • May require a BIG lump sum payment
  • Or may require other types of burdensome catch-up payments
  • Your loan may take longer to pay off
  • You continue to accrue interest
  • Uncertainty about how your property taxes & insurance will get paid
  • Potential for broader economic impact

Beware of mortgage fraud

Another thing you might want to be aware of is the potential for mortgage fraud and the consequences that come with that.

This potential is there because the CARES Act does not require homeowners to submit proof of their hardship. If they have a government-backed loan, they simply have to call their servicer and tell them they've experienced hardship because of coronavirus and the servicer must grant the forbearance.

However, Mark Calabria, the chief regulator of Fannie Mae and Freddie Mac, begged borrowers to "Be honest" when it comes to requesting forbearance.

For starters, if you can pay it, you'll be in a better long-term financial situation because you won't have to worry about an extended mortgage term or larger catch-up payments.

But also, if it's discovered that you lied about needing forbearance because you could afford to make your mortgage payment, you will have committed mortgage fraud. Since it's typically a felony, there are a variety of serious consequences including prison sentences and large fines.

So, once more, we want to reiterate that if you can pay your mortgage, PAY IT!

Are there any other relief options?

Yes! Mortgage forbearance is not your only option.

Refinance into a VA IRRRL

For veteran borrowers, especially, you may be able to refinance into an IRRRL, which is the VA loan's version of a streamline refinance.

IRRRLs can be done quickly. They're one of fastest types of loans, from application to close. In addition, if you refinance, you won't have to worry about the financial burden of future catch-up payments. Other benefits of using an IRRRL to get mortgage relief include:

  • Deferring up to two payments, giving you immediate financial relief
  • Reducing your payments going forward by reducing your interest rate

Look for local relief programs

Homeowners in some states may qualify for what is called the "Hardest Hit Fund." This is a state-run program that was federally mandated in 2010 to help those in states hit hardest by the housing collapse. The fund still exists today, so if your state was included on the list, the program may be able to help you.

In addition, states may also have other unique-to-them programs available. To learn more about what can be done for you in your area, simply contact your state's housing agency.

Finally, at an even more local level, it doesn't hurt to check with your county's housing department. Some counties set up assistance programs for those who live in their boundaries.

How do I request mortgage forbearance?

If you've decided you would still like to pursue mortgage forbearance, you need to do it right away, before your payments are overdue. However, the process itself isn't too hard, as long as you follow these 5 steps:

1. Contact your loan servicer

We've mentioned the term "loan servicer" a few times throughout this article, and you might not be sure of who they are.

For starters, there's a good chance that your servicer isn't the same company you did your loan with. And they definitely aren't the loan officer who helped you get your mortgage.

To find out who they are, simply take a look at your mortgage statement and find the customer service number. If you call that number, it will get you to the people at your servicer's office who can help you.

2. Explain your situation

Once you're on the phone with someone, tell them you want to request mortgage forbearance and let them know why you can't make your payments going forward.

Maybe you lost your job or were furloughed because of business closures caused by the coronavirus. Maybe your hours were cut. Whatever the reason, let them know.

Also, make sure you tell them you have a government-backed loan, if you know that information. If you're not sure if your mortgage is backed by the government, let them know that too, and they can help you figure it out.

3. Discuss the details

At this stage, it's time to hammer out the specifics of your mortgage forbearance plan.

To start, you should let the customer service agent know if you're able to make partial payments or if you will need to pause your entire payment for the 6 months allowed by the CARES Act.

You should also ask about the repayment plan and time frame.

Will you need to pay ALL of it at once? Or can you make catch-up payments for a period of time after forbearance ends? You should also try to find out if they'd be willing to simply lengthen your loan term.

Finally, make sure you understand what they'll need you to do if you end up having to extend your forbearance an additional 180 days.

4. Get the forbearance plan in writing

Before you get off the phone, summarize what you agreed upon to make sure you understood everything correctly. Once that's confirmed, make sure you ask them to send you the forbearance agreement in writing.

Verbal agreements aren't necessarily binding, so you need to get it written down, and you'll want to keep a copy of it for yourself so that going forward, you'll have it to refer to.

After they send the agreement to you, review it. Make sure it was what you discussed over the phone. If any changes need to be made, call them back as soon as possible.

5. Monitor your situation

Once you're in your forbearance period, and even afterwards, you'll want to periodically check your mortgage statement against the forbearance plan you received in the previous step. You will need to make sure there aren't any errors that don't match the agreement or repayment plan.

You should also monitor your credit report. Forbearance shouldn't lead to any negatives or delinquencies on your report, so if one shows up, you'll want to make sure it gets removed.

Monitoring your situation also includes updating your servicer if you need to request an extension of your forbearance.

On the other hand, you may want to contact them if your situation improves quicker than anticipated. If you regain employment within the 6 or 12 months, it might be financially wise to contact your servicer about amending and shortening your forbearance period so you have less money to catch up on later.

What if I still have questions?

If you still have questions about mortgage forbearance, feel free to give us a call at Low VA Rates, even if we aren't your lender or servicer. You can reach us at (866) 569-8272.

This is a difficult time, and we want to give as much help as we can. We know that together, we can get through it.