THE federal CARES Act provides two benefits if you have a financial hardship caused directly or indirectly by the coronavirus and your loan is owned or guaranteed by a federal agency including Fannie Mae, Freddie Mac, the Federal Housing Administration, U.S. Department of Veterans Affairs and U.S. Department of Agriculture. Both the state and federal government have negotiated mortgage freezes with many big lenders.
What is mortgage forbearance? Forbearance is when your mortgage servicer or lender allows you to temporarily pay your mortgage at a lower payment or pause paying your mortgage. You will have to pay the payment reduction or the paused payments back later. Forbearance can help you deal with a hardship, such as, if your home was damaged in a flood, you had an illness or injury that increased your healthcare costs, or you lost your job. Forbearance does not erase the amount you owe on your mortgage. You will have to repay any missed or reduced payments.
How to request a forbearance? Call your servicer and let them know your situation immediately. Ask them what forbearance or hardship options may be available. Some servicers will require that you request forbearance or other assistance within a certain amount of time after a disaster or other qualifying event.
Mortgage forbearance options. Forbearance is complicated. There isn’t a one size fits all because the options depend on many factors. Those factors include: 1) The type of loan; 2) The owner or investor requirements in your mortgage loan; and 3) Your servicer. There are key things to consider with each type of forbearance. You’ll want to pay close attention to how your servicer expects you to pay back any missed or reduced mortgage payments.
Here are some forbearance examples to guide you:
• Paused Payments Option-Paid During Existing Mortgage: Your servicer allows you to stop making payments for six months, but you must pay everything back at once when your payments are due again. What to consider: You may owe a big bill that comes due all at once. For example, if your servicer allowed you not to pay your mortgage for six months, at the end of the forbearance period, you may owe all six of your missed mortgage payments in one month. Interest on the paused amounts will continue to accrue until you repay them.
• Mortgage Payment Reduction Option: Your servicer allows you to reduce your $1,000 monthly mortgage payment by half for three months. After the three months are over you have one year to pay back the amount of that reduction. What to consider: The amount of the reduction would be spread out over 12 months and added to your mortgage payment once the reduction period is over. This means your monthly mortgage will increase during that one-year period. Using the example above, you would pay $500 for three months and starting on the fourth month you would need to pay $1125.00 ($1,000 + $1500/12) each month for the next 12 months. Interest on any reduced amounts will continue to accrue until you repay them.
• Paused Payment Option-Paid back at End of Mortgage: Your servicer allows you to pause payments for one year, and that amount is repaid by either adding it to the end of your mortgage loan or by you taking out a separate loan. What to consider: You can extend the term of your loan for some amount of time to pay back the paused payments or take out a separate loan. Extending your loan means the missed payments will be added on to the end of your loan. For example, if you were given a 12-month period where you didn’t have to pay your mortgage, you’ll have 12 months of payments added on to the date when your loan was supposed to be paid off by. Extending with a separate loan means that when your mortgage is due you’ll also have to pay off this separate loan. This is like a balloon payment, which is one large payment due at the end of your loan. Interest on the missed amounts will continue to accrue until you repay them.
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Martin Santiago is a broker associate at Compass Burlingame, a full-service residential brokerage firm. He is also a licensed mortgage loan originator & an International Associate at the American Institute of Architects. The information presented in this article is for general information only and is not, nor intended to be a formal legal advice nor the formation of a broker-client relationship. Call or email Martin at (415)850-7704; [email protected]; www.teammsquare.com.