The CARES Act includes an option for U.S. homeowners with a mortgage backed by the government to pause their monthly payments for up to 12 months if they experience economic hardship as a result of COVID-19.
This mortgage forbearance program provides a way for homeowners to avoid delinquencies and potentially foreclosure when they experience job or income loss related to COVID-19. Forbearance is not an automatic procedure. Borrowers need to contact their lender directly to say that they face an economic hardship that will keep them from paying their mortgage on time.
Forbearance is not forgiveness and borrowers are responsible for paying the full amount of their loan. There are four ways generally that borrowers will make up missed mortgage payments:
1) Payment plans, which include making larger monthly payments when the forbearance period ends;
2) Loan modifications, whereby the lender makes changes to loan terms, often by extending the loan period;
3) Payment deferral option, announced as an option on May 13th by Fannie Mae and Freddie Mac, which allows some borrowers to repay their missed payments at the time the home is sold, refinanced, or at loan maturity; and
4) Lump sum payments, which cannot be required by lenders covered by federal forbearance rules but can be an option for some borrowers.
More than 4 million homeowners have entered into mortgage forbearance over the past couple of months. While the numbers of new applications for forbearance have declined dramatically in recent weeks, at the end of May, about 9% of all home loans were in forbearance, including 7.2% of loans backed by Fannie Mae and Freddie Mac, and 12.6% of FHA and VA loans. Prior to COVID-19, only 0.25% of loans were in forbearance.
Despite the goal of targeting homeowners facing economic hardships, there is new survey data out that shows that most homeowners who received a mortgage forbearance did not really need one. In a survey of more than 1,300 homeowners, LendingTree found that 70% of respondents who received mortgage forbearance stated that they could have made their monthly mortgage payments but “just wanted a break from their normal payments.” More than a quarter (26.2%) of survey respondents said they could have paid their mortgage, but they would have had to skip paying other essential bills. Only 5% of respondents said they would not have been able to pay their mortgage at all, and therefore truly needed to forbearance program.
Key takeaways for Virginia REALTORS®:
- Mortgage forbearance can be an important option for homeowners who face an economic hardship, helping to keep them from falling into delinquency or foreclosure.
- COVID-19 mortgage forbearance should not negatively impact a borrower’s credit because federal rules state that skipped payments during forbearance cannot be reported as “late” or “missed.” However, borrowers should check their credit reports regularly.
- Forbearance is not forgiveness. Homeowners who apply for a forbearance should know that they will need to make up missed mortgage payments and should have a clear understanding from their lender about the repayment process.
- While the option is there, borrowers should think very carefully about whether they need a mortgage forbearance. Entering into a forbearance program can place limitations on future applications for refinance or purchase loans.
- The federal mortgage forbearance option will help reduce the number of delinquencies and foreclosures, ultimately helping to stabilize the housing market and keep home prices from falling.