How Mortgage Forbearance Affects You

COVID-19 restrictions put a financial strain on millions of Americans. In an effort to prevent a surge in homelessness, the CARES Act included a mortgage forbearance program. The forbearance allows struggling homeowners to essentially put their mortgage payments on hold. The forbearance was initially only going to run for 360 days but has since been extended to allow homeowners 15 months of relief. The 15 months begins once they first make a request for forbearance. 


How Does the CARES Act Help?

The CARES Act was the first of the three COVID relief plans aimed at helping Americans whose income had taken a hit due to COVID lockdowns. Amongst other areas, mortgage relief was addressed in the plan. At the time, it was unknown exactly how many homeowners would be unable to make their mortgage payments. Since close to seventy-five percent of mortgages are government-backed, the result of millions of people defaulting on their mortgages would have been devastating to our economy. 

A mortgage forbearance under the CARES Act allows homeowners to put off paying their mortgage for up to fifteen months. During that time, lenders are not allowed to foreclose on your property. The payments are not forgiven however, and the borrower does eventually have to repay the payments that were skipped. 

Repayment can be made in a few ways. You can enter into a repayment plan which will give you six months to pay back the amount you owe, including the interest that accrued during that time. You can also opt to repay the amount in the form of a lump sum. Remember that you will have to pay this amount back plus your regular monthly mortgage payment. 


Who is Eligible?

Eligibility for forbearance largely depends on the type of mortgage loan you have. Government-backed loans are eligible; privately-owned loans may not be. Government-backed loans are those that are owned by Fannie Mae and Freddie Mac as well as VA, USDA, and FHA mortgages. If you aren’t sure what type of loan you have, you should be able to look at your billing statement or call your lender for clarification. 


To start the process and enter into forbearance on your mortgage, you need to follow a process that includes an application and approval with your lending institution. You do not want to stop making payments without getting approval and completing the application process first. If you do it will reflect as nonpayment on your credit causing your score to take a significant hit.


Because lenders are being inundated with requests, they are not requiring documentation as you would normally be asked to provide as proof of hardship. Calling your financial institution to discuss your options is your best course of action. 


Will Forbearance Ruin My Credit?

Fortunately, as long the forbearance has been granted before you stop making payments., mortgage forbearance will not negatively impact your credit. Skipping payments or making partial payments before the forbearance has been granted through your lender will harm your credit, so it is important to find a way to continue to make payments. 


Bottom line

Forbearance under the CARES Act is helping millions of homeowners avoid foreclosure. If COVID-19 impacted your financial situation and entering into forbearance sounds like it could be of benefit to you,, you have until June 2021 to request a mortgage forbearance. It is good to keep in mind, the money you owe will eventually become due. So even if you are granted a forbearance, try to set aside as much as you can for once the forbearance period ends. 


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