For many homeowners, the COVID-19 pandemic has been a challenging time. In the spring of 2020 many found themselves with reduced or no income. They were unable to pay their mortgage. Along came the CARES act giving homeowners the ability to enter into a forbearance period. Forbearance means no payment on their mortgage was due. The missed payments are not forgiven and must be addressed in some manner once the forbearance period ends. These forbearance periods were allowed to last up to 6 months with an extension of an additional 6 months if needed. For those who began their forbearance in the Spring of 2020, the end of their 12 months is upon them. Now what do you do?
Mortgage Types
First we should explore those mortgages covered by the CARES act. The CARES act provisions apply to federally issued or back mortgages. These include FHA, VA, USDA loans as well as those held by Freddie Mac or Frannie Mae. Collectively this covers a little over 70% of all residential mortgages in the United States. In other mortgages, the lender may have offered forbearance relief to borrowers but were not required to do so by the CARES act. For these non-CARES mortgages the homeowner will need to negotiate with their lender on how to get back on track and the options will vary from lender to lender and from individual to individual. For those in the 70% covered by the CARES act, read on to explore options.
Options at the end of Forbearance
There are several options that should be explored when your forbearance ends. These options include refinance of the mortgage, deferral of missed payment, loan modification, payment of missed payments in a lump sum, and payment of missed payments over a set amount of time.
Options for those who can’t pay their full monthly payment
One option to consider is to simply refinance the mortgage. This option will be appealing to those who have a higher interest rate in their current mortgage and who have the income now to qualify for a new mortgage.
Loan modification is a modification of the terms of your existing mortgage with your current lender. While loan modifications existed before COVID-19, the use of loan modification is expected to expand greatly as those who were forced to forbear their payments come to the end of their forbearance. A loan modification can change the total amount you owe, the interest rate, the required monthly payment, and the length of time it will take to complete payments of the mortgage. When evaluating this option it is important to consider all the impacts, both short term, and long term. For example, if you are 12 years away from having your mortgage paid off, it may not be wise to extend the term so it will take another 30 years all for the advantage of dropping your payment a couple hundred dollars per month.
Options for those who can resume regular payment
Homeowners who can resume regular payments may be offered a deferral of the missed payments. Under this option the missed payments will be “placed at the end of your loan”. You will resume making the regular monthly mortgage payment and the missed principal and accumulated interest will be due at the time of mortgage maturity (i.e. at the end of your 30 year mortgage) or will be paid off when you later refinance or sale your home. For many this may be the most attractive alternative.
Options for those who can pay more than their regular payment
Homeowners who can pay more than their regular payment but can’t pay the total of missed payments may be able to enter an extended period of repayment. In this option homeowners seek to pay the missed payments by paying extra beyond your regular payment for several months until your mortgage is current. For example, if you missed 8 months of payments of $1000, you might pay $1500 per month for 16 months to catch up all missed payments before resuming the $1000 payment.
The simplest way, for those who are able, to end the forbearance is to simply pay all missed payments to your mortgage company in one payment, then resume your regular payments. While this is beyond the ability of many, if possible it is the surest way to get your mortgage back on track.
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