The federal and state governments, as well as the home mortgage industry, have stepped in to offer homeowners ways to get through this crisis without going into foreclosure. As part of the COVID-19 financial relief efforts, the recently enacted CARES Act, which includes substantial assistance to corporations, small businesses, and laid-off workers, also includes important provisions to help you keep your home. It allows you to suspend mortgage payments without fear of foreclosure, ruined credit, or late fees. It buys you time.
That could be a good deal for some consumers, but they must read the fine print of the agreement. The CARES Act does not provide guidance to lenders and loan servicers on how to pay back missed payments. In the absence of further guidance, lenders and loan servicers can negotiate their own deferred payment program. Be sure you understand all the terms of the offered contract before signing to avoid putting your financial health at risk. Focus Capital has put together a Q&A to help guide consumers as they are considering applying for forbearance.
Q. Does the CARES Act apply to everyone with a mortgage?
No. The CARES Act applies only to mortgages that are “federally backed,” meaning mortgages that are owned or guaranteed by the government through the big corporations Fannie Mae and Freddie Mac, or through the Federal Housing Administration or another government agency. About 70 percent of mortgages are federally backed. To find out if your mortgage is backed by a federal agency, ask your lender.
Q. What if my mortgage isn’t federally backed?
Lots of banks have their own mortgage suspension programs, most of them similar to the provisions of the CARES Act. Go to their websites.
Q. How do apply for forbearance or request a suspension of mortgage payments?
The CARES Act says you can request suspension of payments. The key word here is “request.” The CARES Act doesn’t make suspension (a.k.a., forbearance) automatic. You have to contact your servicer. You could call or go to your servicer’s website and look for a form to fill out requesting forbearance. Make sure to save and date what you have written on the form for your records. Or find an e-mail or street address for your servicer or lender and write a short letter.
You need your lender’s approval to suspend payments for a couple of months or longer — what’s known in banking and legal circles as “forbearance” due to “hardship.” But remember, payments you skip aren’t waived or forgiven or erased. You will have to make them up when you get back on your feet.
Q. Do I have to prove financial hardship due to the COVID-19 outbreak?
The CARES Act limits its provisions to those affected by the coronavirus but there are apparently no requirements to prove it. It’s a good idea to make a simple and brief statement describing how the virus has caused loss of income.
Q. How long can I suspend payments?
Six months on mortgages backed by Fannie Mac or Freddie Mac (with a possible renewal period of six months); a year on mortgages backed by federal agencies such as FHA. But remember, interest on the paused amounts will continue to accrue until you pay them.
Q. What are the payback options offered by lenders?
This is where reading the fine print is important. The payback payment option offered by your loan servicer is a key factor whether this makes financial sense to sign the agreement. The three main available options are:
1. Balloon Payment:
The one you probably want to avoid is a balloon payment. Let’s say your mortgage payment is $2,000 a month and you miss three months. Under the balloon alternative, when you resume payments, you owe $6,000 in missed payments, plus the new month’s payment, for a total of $8,000. Not making the full payment opens the door to interest accrued for those three months as well.
2. Month Over Month:
The Month Over Month alternative has you pay double the monthly payment until the missed payments are paid back. Consider a homeowner who makes a monthly mortgage payment of $2,000, and the mortgage company offers a three-month forbearance with no additional interest. You opt to skip payments in April, May and June. You will still owe the mortgage company $6,000 on July 1. The mortgage company will have you pay $4,000 (current monthly payment + 1 month suspended payment) in July, August, and September. In October all suspended payments will be satisfied, and you will go back to your normal monthly payment of $2,000. Again, not making the full payment opens the door to interest accrued for those three months as well.
3. Term Extension of Mortgage:
This is the most favorable and manageable option for consumers. Let’s say your last mortgage payment is now scheduled for December of 2025, but you miss three payments this year. You may agree to extend your monthly payments to January, February, and March of 2026.
Q. What about my escrow account?
For many borrowers, they include extra money in their monthly mortgage payments to cover property insurance and real estate taxes. This is something that should be discussed with your servicer since it could leave you short when property taxes are due.
Q. Is my credit score safe if I skip some payments?
The CARES Act requires lenders to report to credit bureaus that homeowners are current on their mortgages even if they have missed payments.
Q. What does the CARES Act do about foreclosure?
Under the law, your lender cannot initiate foreclosure until at least May 17 (and then only if you are at least four months behind in payments.)
Q. Are there other protections against foreclosure?
The state Division of Banks is calling for postponement of foreclosures for at least 60 days in guidelines it issued March 25. While the guidelines aren’t law, the state considers it “essential” that lenders follow them. The guidelines cover banks, credit unions, and mortgage servicers, which are banks and other businesses that collect payments and otherwise manage mortgages without actually owning them.
The Risk
The risk of applying for forbearance is, even with a consumer’s best intentions to minimize costs and penalties by taking advantage of the offer, could turn into a larger liability. If the consumer is unable to payback the deferred payments according to the negotiated contract with the loan servicer, the debt could be turned over to a collection agency. A consumer risks foreclosure, damage to their credit score, and hefty late fees. If you can pay your mortgage, do it. If you think you can’t, take steps now to protect yourself.
