CARES Act Mortgage Forbearance
As a result of the Covid-19 pandemic, the federal government and lenders offered payment suspension and mortgage forbearance programs to millions of Americans. Under the CARES Act, approximately 2.5 million homeowners were enrolled in the forbearance program by March 2020.
In this article, we’ll talk about what mortgage forbearance is and how it has helped homeowners with federally backed mortgage loans. We’ll also explore the rules of forbearance and the payment options you have. Finally, we’ll discuss what happens when your forbearance ends and what to do when you’re unable to pay your regular mortgage after forbearance.
CARES Act Mortgage Forbearance: The Definition
Initially, the large sum allocated in the Act was to be sent out individually to people who submit tax returns in America. Later on, several proposals were tied to the Act so as to lessen the damage caused by the Coronavirus pandemic.
One of the proposals was a moratorium to forbid foreclosure and evictions for homeowners. The moratorium under the Cares Act was meant to give people who are having trouble managing their mortgage payments temporary relief for the payments.
Under the terms of forbearance, a lender agrees to suspend certain payments for a specified period and doesn’t charge fees or interest for the mortgage forbearance period.
Since the mortgage forbearance CARES Act was put in place, many people who were out of options and on the brink of losing their homes got a chance to stay in their houses. According to the latest update of the Act, a homeowner is allowed to postpone making mortgage payments for up to 12 months and save enough money to pay off the loan when they regain financial stability.
This act has helped many homeowners who are trying to cope with unemployment, medical hardship, or other financial crisis due to Covid 19.
Please note: Forbearance is not a form of loan forgiveness. You still have to pay your regular mortgage payments and the amount you missed during the forbearance period.
Cares Act Mortgage Forbearance Rules
The mortgage forbearance under the CARES Act comes with the following rules and requirements:
- The CARES Act mortgage forbearance only applies to federally backed mortgage loans. These include those insured and/or guaranteed by:
- Federal Housing Administration
- National Housing Act under section 255
- Department of Veterans Affairs
- Department of Agriculture
Loans securitized or purchased by Fannie Mae and Freddie Mac also fall under federally backed mortgage loans.
2. The initial forbearance will last for 18 days or six months but can be extended for another 180 days for total forbearance.
3. To get a forbearance, you must liaise with your servicer and provide confirmation to them that you have had a financial hardship due to Covid 19.
4. You should provide only documents you attest to your loan provider.
5. During the forbearance period, your loan servicer can’t charge you interest fees or penalties.
6. Your loan servicer is prohibited against negative credit reporting as long as you follow the agreement you made and stick to the terms of it.
7. No foreclosure or evictions can be done when your mortgage is under forbearance.
When does Mortgage Forbearance End?
Your mortgage forbearance Cares Act end date depends on when you requested the forbearance and the plan you went with.
The Cares Act allows an initial forbearance of six months utmost for homeowners with conventional loans (FHA, USDA, and VA).
However, you may request a six-month extension after the initial period to clock total forbearance. This means that a total forbearance under the CARES Act goes for one year.
So, assuming you requested forbearance in January 2021, your initial period ended in June 2021. If you requested an extension, your total forbearance period ends in January 2022.
What is the best time to end mortgage forbearance?
The best time to end your mortgage forbearance is when you’re comfortable making the missed payments. So if you have the finances at the end of the six months initial period, you must not commit to a total forbearance.
But before you make the financial decision on when to end the forbearance, understand the payment options you have, so that you know the kind of financial foundation you need.
Remember that you’ll still need additional money to make regular monthly payments for the remaining period.
CARES Act Mortgage Payments
When your forbearance period ends, you need plans to make your mortgage payment.
As mentioned above, mortgage forbearance is not loan forgiveness, so you need to be prepared to pay regular payments and the payments you missed in the entire period.
Here are the options you have:
This is when you pay the entire missed amount as a lump sum. But, this is an option you have as a borrower and not a requirement by lenders.
If you can’t afford to pay a lump sum for the missed payments, you can repay the amount over a period of 3-12 months. However, you need to pay this along with your standard monthly payments.
Loan term extensions
You can lengthen your loan term and pay the missed payments at the end of the new term. The demerit of extending your loan term is that you’ll have additional mortgage payments to make.
Loan term modifications
If you’re at risk of default, you can pursue a change of the loan term. The modifications can be in form of reduced interest rates, reduced monthly payments, or reduced loan length.
If you had a conventional mortgage loan (FHA, USDA, and VA), the government allows a reduction of the monthly payments by 20 to 25%. Other lenders, such as the Federal Housing Finance Agency, also offer loan modification options as well as other payment options.
What is the right CARES Act mortgage payment option?
It depends on your situation. If you’re employed and in the right financial status, you can make the full repayment then continue making your regular payments afterward.
If you’re unemployed and have limited finances, you can make the payments intermittently, or pursue other options such as loan term modification or loan term lengthening.
Tip: Discuss in-depth your preferred mortgage payment option with your lender, so you know exactly what to expect.
During a Forbearance Period, Can you Refinance or Get a New Loan?
As a general rule, you’ll be eligible for refinancing or a new loan if you made your mortgage payments as agreed during forbearance.
If you’re refinancing an FHA loan, you’re required to have made all the payments as agreed during forbearance. If not, you’ll need to make three consecutive scheduled payments after choosing your loan repayment option. These terms apply for rate and term refinancing.
In order to do cash-out refinancing, you must make payments for an entire year.
In the case of VA loans, you can bring your payments current or refinance to pay off any past due to payments if you qualify.
Fannie Mae or Freddie Mac conventional loans require you to make up all the payments on your mortgage that has been in forbearance or have made three consecutive payments under a workout plan to qualify for financing.
Paying Regular Mortgage after Forbearance has Ended
You should be able to continue making your regular mortgage payments after the forbearance period ends if you carefully evaluate your financial situation when choosing your payment option.
It’s normal, however, to still find it hard to pay a regular mortgage after the forbearance ends, as the financial situation is still unstable.
You have the following options if you find yourself in this situation:
- Selling your home
- Short sale, and
Since these options can damage your credit, they should be reserved as a last resort.
How to decide whether to sell your home under forbearance
If you are about to end your forbearance and wish to sell your home, there’re two major factors to consider: significant gains inequity and a costly housing market.
As a result, you might make lots of money from a sale of your home, but you may face a highly inflated housing market, depending on where you move. So, you should do your research and prepare a budget beforehand, to know precisely how much the home sale will cost in total.
Homeowners struggling to pay their mortgage due to the Covid 19 pandemic have found mortgage forbearance under the CARES Act extremely beneficial. Those who have benefited from forbearance should make the payments when they regain financial stability.
Whatever the end date of the mortgage forbearance is, it’s advisable to evaluate your financial position as well as the options you have for making up the missed payments.
The good thing is, you must not pay a lump sum for the missed payment. Even better, there’re options such as loan term extension and loan modifications. But the thing is, you have to pursue them as nothing in forbearance is automatic.