COVID-19, Mortgage Forbearance and the Next Steps
In March, the federal government put into law the CARES Act which helped affected homeowners put their mortgage into forbearance. The initial plan allowed homeowners to stop making payments on their mortgage for 3 months without risking a penalty or foreclosure.
As we are near the end of the 3 months, many homeowners wonder, what now? The forbearance plan doesn’t erase your debt – it gives you temporary relief. You may make the payments if you can afford them or wait, but your credit score won’t drop and your lender can’t assess penalties. The key is how you get out of the forbearance plan. Since the plan is temporary – it only protects you for 3 months. It’s how you handle your mortgage after the 3 months that matters.
Repayment Options after Forbearance in the CARES Act
After your three-month forbearance, you must pay back what you owe in one of the following ways: Reinstate the mortgage – If you’re capable, you may pay the full amount you owe and get back to your regularly scheduled payments.
Repayment plan – Your lender may work out an affordable repayment plan, spreading the amount you owe out over an extended period. This amount is in addition to your regular monthly payments. Make sure you can afford the full amount suggested.
Loan modification – If you can’t afford a repayment plan or need help affording your regular payments, you may apply for a loan modification. Depending on your lender’s choices, you may secure a lower interest rate or longer term.
The first two repayment options don’t affect your loan agreement. You carry on with business as usual. The last option does change your loan agreement, so make sure you understand the full implications. For example, if you extend your term, you lower your payments, but you increase the interest you pay over the loan’s lifetime.
Refinancing or Taking out a New Mortgage after Forbearance
Fannie Mae and Freddie Mac also made it easier for borrowers that used the forbearance plan to refinance their mortgage or buy a new home.
The new guidelines state that when the borrowers reinstated their mortgage, and are current on their payment, meaning they would have caught up on the deferred payment amount, there is no restriction for them refinancing or purchasing a home. If they entered a repayment plan or modified their loan they may get a new mortgage (purchase or refinance) after three months of payments (even modified payments).
The new guidelines allow anyone, even those affected by COVID-19 and unable to afford their mortgage, to take advantage of today’s low rates. This also helps keep the mortgage industry flowing, potentially avoiding a repeat of the housing crisis of 2007. If your mortgage went into forbearance, it’s time to figure out your options. How will you get out of it? What help do you need? Contact us today to discuss your options, and long-term goals for your current mortgage or with your future home purchase.
Frequently Asked Questions
Mortgage forbearance under the CARES Act allows homeowners to pause mortgage payments for 3 months without penalties or risk of foreclosure, providing temporary relief.
No, forbearance does not erase the debt; it only delays payments, and homeowners must repay the missed amounts after the forbearance period.
Homeowners can reinstate the mortgage by paying the full amount owed, enter a repayment plan to spread out missed payments, or apply for a loan modification to adjust loan terms.
A loan modification changes the loan agreement by potentially lowering payments through a reduced interest rate or extended term, which may increase total interest paid over time.
No, entering forbearance under the CARES Act will not lower a homeowner’s credit score, and lenders cannot charge penalties during the forbearance period.
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