Real Estate Tips

Covid-19 and Mortgage Forbearance

Because of the Coronavirus, many of us saw our paychecks substantially decreased, or in some cases, completely eliminated.  The only option for many, was to seek relief under the Cares Act, and obtain a forbearance of up to 180 days on the mortgage.  If you were lucky enough to have a Federally Backed mortgage, the forbearance was pretty easy to obtain. For some renters, it also meant that you could not be evicted for at least 60 days.  The end of the time period for both homeowners and renters is quickly approaching, and many are wondering what their options are now.  Let's review those options:

If you received a forbearance on your mortgage, you were probably given one of three options: 

1. To add the amount of the skipped payments from your forbearance to the end of your loan, and extend the loan on the back end.
2. To spread out the missed payments over a set number of months after the forbearance period ends.
3. To pay back a lump sum at the end of the forbearance period.

Option #1 was probably the best option if you received a forbearance.  If you received option #1 you can add the missed payments to the end of your mortgage.  Although you might end up paying more in interest in the long run, it does soften the blow by buying you more time.  But make sure you read the fine print to determine if your interest rate is increasing or if there are any other change in terms.

Option #2 is actually a two-part option. It would involve a forbearance followed by a loan modification. The devil is in the details on this one so be sure to ask lots of questions. For example, how many months do you have to make up the missed payments? (most of the time it's 12 months). What will your new payment be?  Will your interest rate increase? Will the terms of the mortgage change?  Will your credit be impacted?  Is there lump sum at the end of the modification?

Option #3 is probably the most straight-forward, and in my opinion, it is also the worst option.  This option is banking on the fact that after the forbearance period, you will pay back all of the missed payments in one lump sum. So, a few months from now, you might indeed be re-earning a paycheck, but if you don't come up with the entire amount of the missed payments, you might be facing a foreclosure. And with the average mortgage being around $2000 per month, you might need to come up with anywhere between $6000 to $18,000.  And if the bank has added on any extra fees, you might really be in for a shock! 

So what should you do now?  I'm glad you asked, because there is still time. First, call the bank or mortgage company and see which program you have.  I have heard from many people, that they were unaware that they had the "lump sum" option because they assumed that the Cares Act either forgave the payments entirely, or put them on the back of the loan.  Call now to find out which program you are in.  If you are in the Lump Sum option, try to get it revised to one of the other programs.  If that fails, remember that the Cares Act has made some provisions for another 6 month extension, however, please be aware that Congress can change the rules at any time. 

Also, make sure to ask LOTS of questions. Ask what kind of loan you have. Is it indeed a Federally Backed Mortgage that comes under the Cares Act? (most FHA and VA mortgages are Federally backed, while most Conventional Mortgages are not).  Also, don’t assume that you were automatically given a 180-day reprieve.  This can vary with the type of mortgage that you have.  Your reprieve might be anywhere between 60 and 180 days.  Don’t forget to ask what the impact on your credit report might be if you accept the forbearance or the modification.  It might not be worth it if it means a decrease in your credit rating.  If you are offered a loan modification, find out if your interest rate will change and if so, by how much. Ask if any other terms of the loan will change, such as the length of the mortgage, or any additional fees. And if you have a Conventional loan, make sure you get all of you answers in writing.  Many conventional lenders are voluntarily following the Cares Guidelines, however, they have more leeway on the terms that they offer. So, let the buyer beware!

Secondly, if you are renting, you could be in even more of a precarious situation. There was a pause on evictions, but only through the end of May. By June 1st, you might be looking a paying several months’ rent, or facing eviction. The problem with working out rental payment options, is that unlike mortgage payments, the agreement is usually a contract between you and the landlord. The Government does not have the authority to rewrite your lease. Hopefully there will be some kind of continued rental assistance given the economic disaster that is facing the nation.  However, keep the lines of communication open with your landlord.  If you do get an eviction notice, please know that the court, and not your landlord has the last say. The landlord can begin eviction proceedings (usually after three days -- check your lease), but you still have options.  Check out the rental assistance programs, or an attorney.

Most importantly, don't give up! If you can't pay your mortgage or rent, communicate your concerns to the mortgage company or landlord, and do not be afraid to ask to speak with someone higher up on the chain of command.  Utilize an attorney, if you can. They might be able to save you money, or even you home. 

Disclaimer: 

The author of this post is an experienced Real Estate Broker, but is not an attorney. The information provided herein is from reliable sources but is not intended to be legal advice. Any questions of a legal nature should be discussed with a licensed attorney.