Lorraine Ryall
The CARES (Coronavirus Aid, Relief, and Economic Security) Act is a new federal law and relief program that offers provisions for homeowners who may be experiencing severe financial hardship due to the coronavirus pandemic.
As many of my clients know, I specialized in short sales for five years during the market crash from 2008 to 2013 and did over a hundred short sales during that time. When I met clients for the first time, it was heartbreaking to hear some of their stories.
Some were cases where the homeowner had no choice, but I met a lot of clients who ended up in a short sale because they didn’t understand the different loan modification programs being offered at that time. Some were told they needed to miss three months of payments in order to qualify, but did not understand what would happen at the end of the three months, and ended up in foreclosure.
I know this is a very different time and the housing market is not going to crash in the same way it did before. In fact, the Arizona housing market is still very strong. This time it is not a housing market crash that has caused the problem, but the COVID-19 virus and the stay at home order that are impacting our economy. There are, unfortunately, many people who have lost their jobs and need the extra help right now. Even though this is a temporary situation and most people will be heading back to work soon, it may take months to recover, and for many to be back at work full time and able to make their mortgage payments again.
This is where Mortgage Forbearance comes in to help homeowners who are experiencing severe financial hardship due to the coronavirus pandemic.
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)
If a borrower doesn’t have a federally backed mortgage, it doesn’t necessarily mean there isn’t a program available. Servicers for non-federally backed mortgages may still be willing to provide forbearance to borrowers facing financial trouble.
The new CARES Act is constantly evolving, and this is the current information as of the time I wrote this article, but please check all the information with your service provider.
What is Mortgage Forbearance?
Mortgage forbearance is when a mortgage servicer allows you to pause or reduce your payments for a limited time. IT IS NOT FORGIVENESS. These reduced or paused payments will have to be made up at some time in the future.
Ask your servicer what forbearance or hardship options may be available to you. You don’t need to submit any documents upfront to qualify for this financial relief option, however, you should keep documentation from your employer if you have been furloughed. Keep a record of any bank statement or paystubs that would support your petition for assistance later down the road.
Partial payments: Your servicer may allow you to reduce your payments by half for up to three months. After those three months, you will be responsible to pay the missing payments within one year.
You may request a forbearance for up to 180 days. You may also request one extension for up to another 180 days. There will be no additional fees, penalties or additional interest (beyond scheduled amounts) added to your account. After you have secured a forbearance agreement from your servicer, you should discuss repayment options.
What Happens After the Forbearance?
It’s hard to look further than the immediate crisis, but it’s so important to understand the next step in the mortgage forbearance process to protect yourself and your family. The most important part of this program is not so much what happens now, but what happens after the forbearance period has ended.
At the end of the forbearance period, all of the delayed payments are now due in full unless you have a repayment plan. Make sure you discuss your repayment options up front, so you know what is available to you and what your obligation is once the forbearance period ends. If you don’t have a repayment plan in place, are unable to make up all the delayed payments and resume your current payments, and/or continue not making your mortgage payment, the servicer may start reporting the new late or missed payments to the credit bureau, and could start foreclosure proceedings. It is important to have this conversation with your servicer and have a plan in place before the forbearance period ends.
Ask your servicer to provide written documentation that confirms the details of your agreement so you are clear on what the terms are. Having the agreement in writing will protect you if there are errors in your mortgage statement or your credit report.
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.
Alternatively, a borrower may also be offered the option to amortize the balance they owe over the life of the loan. This means they would repay a portion of the balance owed in addition to their usual monthly payments.
Loan Modification
It’s too soon to tell whether a forbearance will be enough assistance for many homeowners or if more will be needed at the end of the forbearance period. One option may be to request to modify the loan at the end of forbearance.
Unlike forbearance, a loan modification involves a permanent change to the details of the mortgage. This can include adjusting the interest rate, extending the duration of the loan or deferring the amount owed until the end of the loan as a separate lien.
The servicer will determine whether or not a borrower qualifies for the modification.
Cash Out Refi or Home Equity Line of Credit (HELOC)
If you still have enough income to qualify, or have enough equity in your home, refinancing or obtaining a secured credit line may be a good option for lowering your payments, consolidating other debts, and/or creating a cash cushion. A refi will be especially beneficial if current rates are lower than those on your existing financing.
These are extremely hard and stressful times, but understanding your options and getting all the information upfront will help you plan for your future. Don’t go into a forbearance without understanding how it applies to you, and how to protect yourself and your credit if you are not in a position to make up all the payments when the forbearance ends. A little leg work now will save you a lot of heartache down the road and may save your credit or even your home.
Please don’t hesitate to contact me if you would like information on the current real estate market, home values, or what options you may have. I have a great group of lenders who can answer any questions you may have on your current mortgage, or the CARES Act, to help guide you.