If you’re among the millions of Americans facing the prospect of unemployment or reduced income due to the coronavirus pandemic, you might be considering asking for a break on your mortgage payment. But keep this in mind: Requesting forbearance on your mortgage isn’t foolproof.
The $2.2 trillion CARES Act stimulus package requires servicers to provide forbearance—or a temporary postponement of payments— to any homeowner with a federally-backed mortgage, and Americans with other mortgages also might be able to receive forbearance at their servicers’ discretion. If you’re thinking about pursuing a forbearance on your mortgage, here’s what you need to know.
1. Forbearance is not forgiveness
If mortgage borrowers receive forbearance, they still will need to pay off their loans eventually. You still owe the money you were paying, but there’s a temporary pause on making your monthly payments. A forbearance agreement enables a borrower to pause payments entirely or to make reduced payments on their mortgage.
Homeowners with federally backed mortgages are eligible for up to 180 days of forbearance initially under the CARES Act. At that point, if they’re still facing financial difficulty, they can request an extension of up to another 180 days of forbearance.
Provisions in the stimulus package stipulate that, during the forbearance period, mortgage servicers cannot make negative reports about the borrower in question to credit bureaus, including the three main ones: Experian, Equifax, and TransUnion. Borrowers also will not owe any late fees or penalties if they are granted forbearance.
2. You need to know who your servicer is
Struggling homeowners won’t automatically receive forbearance. You need to request it from your servicer. Mortgage servicers are the companies who receive your monthly payments. A homeowner’s mortgage servicer isn’t necessarily the same as their lender—many lenders sell the servicing rights for mortgages to other companies.
The first step to figuring out who your servicer is would be to check your mortgage statement. If the information isn’t there, look it up by searching the Mortgage Electronic Registration Systems website. If your loan is backed by Fannie Mae and Freddie Mac, you also can check with them.
3. How do you know if you qualify?
To qualify for forbearance, a borrower must have a mortgage-backed by one of the following Federal agencies:
• Fannie Mae
• Freddie Mac
• The Federal Housing Administration (FHA)
• The U.S. Department of Veterans Affairs (VA)
• The U.S. Department of Agriculture (USDA)
Borrowers should avoid calling their services to find out if they’re eligible because they are currently overwhelmed with call volume. Fannie Mae and Freddie Mac both have websites where you can check and see if your loan is backed by one of them. You can access those websites here and here. Almost half of all mortgages in the U.S. are backed by Fannie and Freddie.
To find out if your loan is backed by the FHA, check the original closing documents or your most recent mortgage statement. If you pay for FHA Insurance, then that agency is backing your loan. Alternatively, your closing documents should include a HUD (Department of Housing and Urban Development) statement and a 13-digit HUD number.
Because the VA and USDA loan programs target specific borrowers, those borrowers should already know if they have loans backed by those agencies. In the event you are still unsure, you can call your servicer.
Aren’t you eligible? You’re not necessarily out of luck. Servicers for non-federally-backed mortgages still might be willing to provide forbearance to borrowers facing financial trouble right now.
4. Be prepared to answer some questions
You don’t need to provide documentation to prove your financial hardship at this time, but your servicer may have some questions to determine how much assistance they will offer you.
The Consumer Financial Protection Bureau (CFPB) suggests being prepared to answer the following:
- Why you can’t make your payments?
- Is the problem you are facing temporary or permanent?
- What is the current state of your income, expenses, and other assets, including money in the bank?
- Are you a service member with a permanent change of station orders?
Consumers should indicate they have had a hardship due to COVID-19, and ask about their forbearance options with the company servicing the mortgage loan. They should ask how long of forbearance they can qualify for, as well as what their options are at the end of that forbearance period.
5. Get your forbearance agreement in writing
The CFPB stresses that any borrower who has received a reprieve on mortgage payments should get their agreement in writing. That will protect you if there are errors in your mortgage statement or your credit report.
6. Watch out for balloon payments
Once borrowers have secured a forbearance agreement from their servicer, they should discuss repayment options. Some borrowers have expressed concerns after being offered a balloon payment option. With a balloon payment, a borrower would pay back the entire amount owed for the forbearance period at once. While a lender may offer this as an option, there is no mandate that a borrower must repay in this manner. Homeowners can, and should, aim to negotiate the best possible repayment options for their situation.
Beyond a balloon payment, servicers may offer to extend the term of the mortgage and tack on the missed payments at the end, so a 30-year mortgage would be extended by four months if that’s how much forbearance a borrower received. A borrower also may be offered the option to amortize the balance they owe during the life of the loan. This means they would repay a portion of the balance owed in addition to their usual monthly payments.
