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Are you affected by lock-down measures related to COVID-19? Do you find it difficult to meet your mortgage payment due to reduced work hours, job loss, or sickness (including caring for one infected with the virus)? If so, you are not alone. While the relief and stimulus packages offered by the government may help pay immediate bills, you may have to resort to other measures to see through this period. Applying for a mortgage forbearance program is one way to address this dilemma.
What is a mortgage forbearance plan?
Mortgage forbearance is an agreement you enter with your lender to lower or pause your regular payment for a temporary period. This does not mean forgiveness of your payments. Interest on your mortgage still accrues. You repay the missed payments when the forbearance period ends.
Have you have requested your lender to pay your taxes and insurance through an escrow account? If so, these payments are still payable during the mortgage forbearance period. Check whether your lender agrees to make these payments on your behalf and add them to the amount due after the forbearance period ends.
How do you repay payments suspended under a mortgage forbearance plan?
Lenders differ in their policies on how borrowers repay payments missed during the period of forbearance. Some may require you to pay the missed payments in one lump sum at the end of the forbearance period. Others may offer a repayment plan spread over several months to settle the missed payments along with usual mortgage payments. Your lender may also agree to change the loan terms so it is easier to handle both missed and current payments.
Mortgage forbearance for government-owned or government-backed loans
If your home loan is from a government institution such as the FHA (Federal Housing Authority) or VA (Veterans Association), or from a government-backed organization like Fannie Mae or Freddie Mac, you have some options when choosing a mortgage forbearance plan and repaying it afterward.
These organizations offer mortgage forbearance plans for COVID-19 related reasons for a period of up to 12 months in two increments of 180 days each. You may pay an amount less than your normal payment or not pay the full amount for six months. If your financial position has not improved during the first 180 days, you can request to extend the forbearance plan up to another 180 days.
These government organizations offer different options to repay amounts due. You may repay all the missed payments in one lump sum at the end of the forbearance period. Another method is to spread out these payments over several months and pay each installment along with the regular loan payment. Thereafter, you revert to paying only regular payments.
Alternatively, you can pay the missed payments at the end of your current loan term. Depending on your position, you can pay the amount as a lump sum or over another twelve months. You can also discuss how to modify your loan to keep payments affordable.
What are the benefits of applying for mortgage forbearance?
A temporary hold on your mortgage payments helps you to manage your finances during a period of hardship. Since the lender does not charge late fees, penalties, or additional interest, your credit score is not adversely impacted.
While states differ in their practices, according to federal law loan servicing companies cannot start foreclosure action unless mortgage payments are past due for over 120 days. According to the CARES (Coronavirus Aid, Relief, and Economic Security) Act enacted in March 2020, borrowers who have loans from government institutions such as Fannie Mae will not have foreclosure action taken against them until May 18, 2020, if their inability to pay is pandemic-related. Many states, cities,and lenders are following a similar practice of staying foreclosure or eviction action during this period.
Should you apply for a mortgage forbearance plan?
While you may be keen to manage your financial commitments to cope with reduced income, what you should think about is whether you will have the means to pay the missed payments when the period of forbearance ends. Note that interest gets accrued during the forbearance period. Similarly, the longer you stretch out the repayment period, the more interest you will end up paying.
If you can afford to pay your mortgage without applying for any relief, that is the best option. Another choice is to pay a lower amount rather than requesting your loan servicing company to suspend the entire payment. There is then less to pay back when the forbearance period ends.
Assess how your income will change after the lock-down ends. If you expect your income to improve to a level that you can pay both missed and normal payments comfortably, then mortgage forbearance may be the right choice. If not, ask your lender what other relief measures are available, including changing your loan terms.
How to apply for a mortgage forbearance plan
The first step in applying for a mortgage forbearance plan is to find out who your home loan lender is. Most lenders offer forbearance schemes to help borrowers cope with the economic downturn related to COVID-19. To see if you qualify, contact your home loan servicing company to find out who owns your mortgage. Look for the contact information for your loan servicing company in your mortgage statement.
What to do after your lender approves temporary mortgage relief
To ensure that there are no snags related to your mortgage relief, monitor your bank account and mortgage statements during the period of relief. Keep a copy of your mortgage documents. They can come in handy if you need to clarify any terms or dispute any payment showing in your mortgage statements.
Keep a close watch on your credit reports. There should be no default of payments or late fees reported during a period of forbearance.
Ask for help
As a borrower, you need to call the company servicing your home loan to ask what payment relief is available. Most banks, credit unions, and other financial institutions have reduced interest rates on credit cards, waived some types of fees, and offer relief on loan payments to consumers affected by COVID-19. All customers can avail of some of these offers for a limited period. For others, ask for help by calling and explaining your position.
Many states have also introduced mortgage relief measures to help homeowners during this time. Check your state’s website to see what help is available.
If you need advice relating to your mortgage, or help in managing your payments, contact the U.S. Department of Housing and Urban Development (HUD) or the Consumer Finance Protection Bureau. These organizations can help you to find a HUD-certified housing counselor in your area.
The spread of COVID-19 has shaken the world in unprecedented ways. If you are among the thousands who are facing financial hardship because of it, consider applying for mortgage forbearance or other relief measures offered by financial organizations. While stimulus payments, unemployment insurance, and other payments can help ease your situation, making a plan to get through this period of hardship will help keep you anchored and hopeful.