The bills are piling up, and you’re losing sleep over how you’ll pay the mortgage. Whether your income has dropped or expenses have increased because of the coronavirus pandemic, you are not alone. Many Americans need help with mortgage payments right now.
Even mortgage servicers that don’t fall under the federal umbrella are offering deferment or forbearance options for homeowners who fear that they won’t be able to pay the next bill.
“When you’re financially strapped, it’s stressful, and people tend to go into deer-in-headlights mode,” says Eric Tolbert, financial advisor, Eric Tolbert & Associates, an advisory practice of Ameriprise Financial Services. “The first step is to have the conversation with your bank or mortgage servicer.”
Still, just because you can get help with mortgage payments doesn’t mean you should. Your lender might give you a break from payments but then tack them on, plus interest, at the end of your mortgage.
Should you seek mortgage forgiveness? Here’s what to know first.
What Are the Terms of Mortgage Forbearance or Deferment?
Mortgage deferment and forbearance both allow you to put off mortgage payments, but the plans are structured differently, explains Sara Singhas, director of loan administration at the Mortgage Bankers Association.
Forbearance allows you to temporarily pause or reduce payments to get through a rough patch. You will have to repay the missed payments, plus interest, after the forbearance period.
Deferment also permits you to skip payments, but it sometimes puts interest on hold. Those payments are due at the end of the deferment or can be tacked onto the end of the loan term.
The CARES Act mortgage provision is somewhat of a hybrid of the two.
Regular interest still applies, but no additional fees, penalties or interest charges will be added while payments are suspended. Your repayment schedule will depend on the loan servicer.
If your mortgage is backed by the federal government, the CARES Act allows you to suspend payments for 180 days. You’re also entitled to a 180-day extension if you need it, for a payment reprieve of up to 12 months.
“Then, borrowers can return to their regular mortgage payment, and for Fannie and Freddie loans, they can extend their loans by the same amount of time,” Singhas says. “So, if you take three months of forbearance, you’ll extend your loan by three months.”
A COVID-19 National Emergency forbearance allows you to pause FHA mortgage loan payments and does not require immediate lump sum repayment. The FHA developed what is known as a partial claim to help homeowners catch up on overdue payments.
A partial claim is a no-interest junior loan secured by your property and payable when you sell your home, refinance it or terminate FHA insurance on your mortgage.
Each mortgage servicer has slightly different rules. Talk to your servicer and find out the exact terms of your relief program.
Does Coronavirus Relief Apply to Escrow?
While your mortgage payments may be on hold, you might not get the same break from property taxes and insurance payments to an escrow account. “Most mortgages have an escrow account for paying property insurance and taxes, and those payments are not deferred,” Tolbert says.
Still, ask your servicer about escrow payments and any relief options. It can’t hurt.
How Does Mortgage Relief Affect Your Credit Score?
Your credit will not suffer, as long as you abide by the terms of your mortgage deferment or forbearance.
When you put relief options in place, you can skip payments under the relief agreement without penalty. “The mortgage servicer will report the loan status as current during the period of forbearance,” Singhas says.
But contact the loan servicer before the payment due date if you think you will miss a payment. You will need to request a deferment or forbearance beforehand to avoid the lender reporting missed payments to the credit bureaus.
Can You Refinance While in Forbearance?
If you plan to take advantage of today’s record-low interest rates and refinance your mortgage, forbearance takes that off the table, at least temporarily. Lenders may want to see you back on your feet for a while before they’re willing to approve a new loan.
“We have situations where people go through the process of forbearance and realize they can pay the bills,” Tolbert says. “If you go through the forbearance process and then decide to refinance your home, a bank won’t consider a refi for 12 to 18 months, depending on the institution.”
Plan to make payments on time and in full for about a year following forbearance before most lenders will approve you for refinancing.
Who Should Consider COVID-19 Mortgage Relief?
Think twice about whether you really need coronavirus mortgage relief.
“We cannot stress enough, if you can continue to pay your mortgage, you should do so,” Singhas says. “Forgiveness is only meant to be an option for people who have had a financial impact and are struggling.”
CARES Act mortgage relief is for borrowers who are facing financial hardship because of the coronavirus. Singhas defines financial hardship as a decline in income and an increase in expenses.
“Borrowers who have experienced a financial impact or believe they will in the next month should absolutely call their servicer and ask what forbearance options are available,” she says.
You don’t have to prove financial hardship or provide supporting documents. But you might have to fill out an application or sign an agreement, according to Singhas.
If you’re late on your mortgage payment, the CARES Act mortgage forgiveness programs still allow you to apply.
Just remember that less is more if you are considering deferment.
“Start with a 90-day period – this will not take away the full six to 12 months you are eligible for,” suggests Keosha Burns, vice president of public relations at JPMorgan Chase. “And, if you are able to resume making payments sooner than you thought, call the servicer. It’s always best to minimize forbearance because you do have to pay that money back.”