Homeowners have had a lot to process and a lot to deal with over the past months as a result of the COVID-19 pandemic. As the economy started to suffer, interest rates dropped, and the rush was on to refinance. Many people found themselves out of work, which caused them to struggle to keep up with their mortgage payments — making temporary reprieves like fixes mortgage forbearance necessary.
If you’ve been struggling to make mortgage payments on time, you may be asking yourself: Is mortgage forbearance an option for me? Is there a way to refinance after forbearance? And what other options do I have?
What is mortgage forbearance?
Before those questions can be answered, you need to understand exactly what mortgage forbearance is and how it works. Mortgage forbearance is when your loan servicing company, which is the company that sends you your mortgage bill, gives you the opportunity to pause your mortgage payments for a short-term, agreed-upon period of time.
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Mortgage forbearance is meant to help keep homeowners from defaulting on their loans through temporary relief. The details of how mortgage forbearance works depend heavily on the type of loan you have and what your lender is willing to offer, but in all cases, you’ll pay back what you owe once forbearance is over. Most lenders won’t require the money in a lump sum, though. You can often spread the payments out over time.
Mortgage forbearance is not the same as refinancing or a loan modification. While these are options that can help and should be explored, it’s important to realize they’re different.
How does a mortgage forbearance work?
Mortgage forbearance is handled by the company that services your loan. If you’re unsure which company that is, you should be able to find it on your original mortgage documents or on any of your regular correspondence. It may be different than the lender you acquired your loan from in the first place. Some lenders sell loans and then turn over the maintenance of that loan to a separate company.
If your lender offers it and you decide you want to go into forbearance, you must opt into the process. This is a formal declaration with the company that you accept the agreed-upon terms. At that point, your payments will pause or be lowered (depending on the terms of the agreement).
Some lenders may allow you to just add the missed payments on as additional payments, extending the length of your loan. Other lenders may charge a higher monthly cost after the pause period, and some might even require full payment at the end of the forbearance period (though this is becoming less common).
Under the CARES Act, which was passed to help people get through the COVID-19 pandemic, all government-backed loans (VA, FHA, USDA, Fannie Mae and Freddie Mac) offer forbearance eligibility for anyone who is financially struggling as a result of the pandemic. You are not required to prove your financial need with documentation.
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Mortgage forbearance during the COVID pandemic
For conventional loans, forbearance is the same now as it was prior to COVID-19. However, many lenders have rolled out programs in response to the pandemic providing homeowners in distress with more options. Remember, your lender doesn’t want you to default and will work with you to try and find a solution.
For federally or Government Sponsored Enterprise (GSE) backed mortgages, the CARES Act brought a lot of changes to forbearance. Your lender or servicer can’t foreclose on you until December 31, 2020 (for most loans) — at the earliest.
You’re able to get 180 days of forbearance if you notify your servicer or lender that you’re experiencing financial hardship as a result of COVID-19. You’re also able to request another 180 day extension if needed, for a total of 360 days of mortgage forbearance. You’ll incur your normal interest costs, but there are no additional fees, penalties or added interest.
You’re not required to submit any documentation as proof to use this Coronavirus financial assistance.
How to refinance after forbearance
In the past, you were unable to refinance your home or purchase a new home while in forbearance. Fortunately, the path to refinancing after forbearance is much easier for federally-backed loans under the CARES Act.
In the past, you were required to make 12 months of on-time payments before you could refinance after forbearance. For mortgages backed by Fannie Mae or Freddie Mac, you now only need to make three months of on-time payments after forbearance to qualify for refinancing. Remember, though, that this is only for certain types of federally-backed mortgages. Homeowners with conventional mortgages need to contact their loan servicer to see what requirements are in place.
[ More: When to Refinance Your Mortgage ]
That said, this isn’t a guarantee that you’ll be approved for forbearance refinancing. Remember, refinancing is when a new lender pays off your old loan and gives you a brand new loan with different repayment terms.
The new lender isn’t going to extend an offer to you unless they’re confident you’ll be able to stay current on your payments. If you’re still out of work or your credit score has been damaged, you might be too risky in the lender’s eyes. Still, it’s worth exploring if you believe you can save money or lower your payments to a more manageable level. The worst a lender can say is no.
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Too long, didn’t read?
Educating yourself on your options as a homeowner is one of the best ways to navigate these turbulent times. If you’ve found yourself struggling to stay up on your payments, reach out to your loan servicing company immediately. Bad news doesn’t get better with time, and there may be options available that can help. You may even be able to refinance your loan shortly after being in forbearance, so make sure to explore all the options at hand to figure out which works best for your needs.
We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.
Due to high unemployment and financial hardship during the COVID-19 pandemic, many mortgage lenders have paused payments or foreclosures to give homeowners breathing room in 2020. Not only that, but interest rates have dropped significantly compared to previous years and the Federal Reserve indicated that it won’t be raising rates for a long time.
