When homebuyers take out a mortgage, they’re likely dreaming about living out their days in a house of their own—whether that means bedecking the front porch with plants or barbecuing in the backyard with the kids.
One question that may not be front of mind when closing on a new house is: what happens to the mortgage if the homeowner experiences an economic hardship?
Thankfully, sudden hardships—such as, being temporarily unemployed or undergoing health issues—do not necessarily provoke a foreclosure.
Some mortgage servicers or lenders allow homebuyers who’ve experienced unforeseen financial troubles to trim or pause mortgage payments in the short-term—through a process called mortgage forbearance.
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So, what is mortgage forbearance? This legal-sounding term indicates that the entity handling a home loan agrees to cut or halt payments on the mortgage—for a brief period.
A mortgage forbearance might allow a homeowner to defer or pare down repayments on their home purchase. While the period of time can vary based on individual factors, mortgage forbearance might be one short-term way to avert foreclosure.
The goal of the mortgage loan forbearance is to give someone a short-term chance to become more stable, financially speaking.
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Understanding Changes to Mortgage Forbearance Rule
While forbearance is not a new concept for mortgages, the rules governing this sort of agreement have changed during the Coronavirus pandemic.
As a growing number of Americans began to struggle to make mortgage payments, the US Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) to provide some relief—including mortgage forbearance protections for a good percentage of homeowners.
More specifically, the CARES ACT allows people who have mortgages that are federally backed—Fannie Mae, FHA, Freddie Mac, USDA, and VA loans—to postpone up to a year’s worth of home loan payment.
If your home debt isn’t backed by one of these government sponsored entities, it may still be possible to request a mortgage forbearance or home loan refinancing directly through the mortgage servicer.
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Identifying a Loan Servicer
If a borrower wants to see if loan forbearance exists for them, one first step is to determine the mortgage servicer, as this may differ from the lender. The lender is the financial institution that originally provided the loan.
In some cases, the lender may also service the loan. But, often, another institution actually manages (or services) the loan—sending out statements, accepting payments, and so on.
If you’re unsure which entity services the mortgage, the answer typically appears on the bill that arrives in the mail or on the website where mortgage payments are made.
A person may be able to find out who services their loan by searching the MERS Servicers ID system. Borrowers can search by property address, name, social security number, FHA or VA case number, or their unique Mortgage Insurance Certificate (MI) Number.
If a borrower discovers that their loan is being serviced by one of the agencies covered by the CARES Act—or by another servicer that is willing to put a mortgage into forbearance—then the question becomes whether applying for these programs is a good fit for that borrower.
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What Does Mortgage Forbearance Really Mean?
When a forbearance mortgage is agreed to, no outstanding payments are actually forgiven.
In other words, the borrower still owes the unpaid balance on the loan and any missed or suspended payments will still need to be paid back at a later date. How repayment will take place can vary by loan servicer.
So, if a borrower decides to pursue a mortgage forbearance, it can be imperative to clarify the exact repayment terms they’re agreeing to.
A good question to ask is whether skipped payments are expected to be paid back in a lump sum right when the forbearance ends or if those missed months might get added on to the end of the loan term.
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Understanding Federally Backed Mortgage Options
For federally- or GSE-backed loans put into forbearance because of COVID, ConsumerFinance.gov provides some specific relief, including the following:
- If someone is experiencing financial hardship because of COVID, they can request mortgage loan forbearance for up to 180 days. Note that a request must be made to the loan servicer.
- If another 180-day forbearance period is needed, the borrower can once again contact the loan servicer and make this request.
- No documentation is required beyond a statement that the borrower is having financial challenges because of COVID.
- No additional fees or penalties will be added to mortgage accounts that have gone into this forbearance.
- There will be no additional interest added to the mortgage account.
- The interest that would typically accrue will continue to do so, being added onto the principal amount of the loan. In other words, interest is not being forgiven during forbearance.
If a borrower’s income stabilizes before forbearance ends, they can contact their federally-backed servicer and begin making payments again.
Because of the CARES Act, these sorts of lenders and loan servicers cannot foreclose on borrowers until August 31, 2020 at the earliest.
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Understanding Private Home Loan Options
Some homeowners may have a private loan servicer, however. This means their home loan is privately owned. In this case, borrowers may still be able to apply for a hardship forbearance directly through their private lender or servicer.
In some cases, private lenders may not ask for more proof of hardship from borrowers than a simple written or verbal notice. In other instances, private loan providers may ask homeowners to apply with more formal documentation—including things like:
- Summaries of current monthly income and expenses
- Recent mortgage statements
- Descriptions of financial challenges currently being faced.
Borrowers with privately owned mortgages may want to ask their lender or servicer which information is expected for a short-term forbearance.
Depending on the lender, you may need to call to discuss options or might be able to start the forbearance request process online. As noted earlier, it can benefit homeowners to ask their mortgage providers what the exact repayment terms would require of borrowers.
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Coming Out of Forbearance
When a forbearance period ends, how will the amount that had been paused be repaid? The answer depends upon the type of loan. Some reasons include:
- Because mortgage forbearance does not erase debt, any missed or reduced payments will need to be paid in some way.
- It’s possible that the sum of money that had not been paid during the forbearance period will be due in full once a loan is out of forbearance.
- This is not true with a Fannie Mae, FHA, Freddie Mac, USDA, or VA loan. With these loans, the amount that was suspended will not be required to be paid back in the form of a lump sum.
- Other lenders may extend the loan period, adding the forbearance dollars to the end of the loan.
- Or lenders may raise monthly payments once a loan is out of forbearance to make up the amount that wasn’t being paid during the mortgage forbearance period.
Borrowers might want to find out how forbearance could affect the amount due once the short-term pause in mortgage payments has ended.
Before deciding whether to pursue a forbearance agreement, borrowers might figure out whether the skipped payments are to be paid immediately back at the end of the grace period or if they’ll be tacked on at the end of the mortgage term.
For those experiencing economic hardships, a lump sum due just months down the road may bring with it a new sort of sticker shock.
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Deferred Mortgage Payments and Credit Scores
If a borrower hasn’t yet fallen beyond on payments, requesting a forbearance mortgage or otherwise modifying a loan to make payments more affordable could help to protect their credit score. Late or missed payments on mortgages, though, would still be included on credit reports.
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More Ways to Lower Monthly Home Loan Payments
Generally speaking, a mortgage forbearance brings short-term relief from temporary hardships. For those who can’t afford to pay their mortgage, other options, like modifying a home loan or mortgage refinancing, may be available.
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Mortgage Loan Modifications
With a loan modification, the original terms of the mortgage are changed through the loan servicer, without an actual refinance taking place.
If, for example, the length of the loan is extended through a loan modification, then the borrower might pay less per month than before—dividing their repayments over a longer number of years.
Still, this decrease in monthly costs often comes at the expense of more interest paid (cumulatively) over the life of the loan. So, again, it can be useful to know whether your goal is to trim monthly payments or save more on interest paid in the long run.
When reaching out to the loan servicer to discuss a loan modification, some questions to ask can include the fees associated with the modification, if any; what the new term and principal and interest payments will be; and whether the modification is temporary or permanent.
Extending the term of the loan typically means that a borrower will pay more in interest over the duration of the loan.
A good question to ask is whether extra funds, when available, can be put towards—what’s still due without penalty.
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Refinancing a mortgage is altogether distinct from modifying a home loan. When refinancing a mortgage loan, the borrower is actually applying for a brand new loan that would then be used to pay off their outstanding home debt.
The new mortgage terms replace the old one, as the original loan has been paid down through the process.
In the case of a refinance, it’s possible that a borrower could qualify for a lower interest rate. Sometimes, it’s workable to cut the principal and interest payments through a refinance without needing to lengthen the life of the loan—and, when this occurs, the amount of interest being paid over the life of the loan wouldn’t go up, either.
In refinancing, certain borrowers might opt to pay less per month by extending the number of years they’ll take to pay back the new mortgage.
Refinancing terms vary, so it’s important for each borrower to understand how a new interest rate or loan term could impact both what they pay each month and during the entire course of the loan.
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