There’s no denying that the COVID-19 pandemic is causing many people financial distress, and that many homeowners have concerns about being able to keep up with their mortgage payments. The good news is that many mortgage borrowers do have options available to them. The CARES Act (a.k.a. The Coronavirus Aid, Relief, and Economic Security Act) gives homeowners with federally-backed mortgages (such as Fannie Mae, Freddie Mac, VA, FHA, and USDA loans) the ability to reduce or delay their mortgage payments for up to 180 days, and possibly longer. And, many financial institutions are extending a similar courtesy to borrowers with other types of mortgages that are not federally-backed. But while a mortgage forbearance can be a true lifeline for those who are struggling financially, it’s important to keep in mind that delaying a mortgage payment should be a last resort. Mortgage forbearance and mortgage deferment can have some serious, unintended consequences further down the road.
Let’s take a looks at some things to keep in mind if you’re considering delaying your mortgage payments.
It’s important to remember that mortgage forbearance and deferment only delay the due date of your payment; they don’t make it disappear. One way or another, you will be required to make up the payments you miss. Because of this, when requesting to pause or reduce your mortgage payments, it’s crucial to discuss with your lender how you will be required to make up those payments once the forbearance or deferment period ends.
One option is to have the missed payments added to the end of your loan. For example, if you were scheduled to pay off your mortgage on July 1, 2022, and you paused your payments for three months, then your new scheduled payoff date would be October, 1, 2022. This is referred to as an extended loan modification.
Another option is for the skipped payments to be amortized over the life of the loan, which means that they would be added to your future monthly payments and spread evenly over the number of months remaining on your loan. For example, suppose you delayed three $2,000 mortgage payments, and you have 5 years remaining on your mortgage. In this case, you would pay back the missed $6,000 over the remaining 5 year loan term. This would mean an additional $100 being added to your mortgage payment each month once the forbearance or deferment period ends.
Another way to repay missed payments is to pay them over the same period of time as the forbearance or deferral. For example, let’s assume that your original mortgage payment was $2,000 per month, and you ceased making payments for 3 months. Under this arrangement, you would repay the skipped $6,000 over the next 3 months after you resumed your mortgage payments. Your new payment for the next 3 months would thus be $4,000 instead of your previous $2,000, because an extra $2,000 would be added for your next three payments.
Yet another repayment option is a balloon payment. With a balloon payment, the borrower is required to repay the missed payments all at once at the end of the forbearance period. In the example above, that would mean that the borrower would pay the entire $6,000 that was missed, as a lump sum after the forbearance or deferment period ends.
Escrow & Interest Implications
Although terms like “forbearance” and “deferment” are being thrown around interchangeably during this coronavirus pandemic, there are some slight differences between the two. With a true mortgage forbearance, interest always accrues, even when the payments are skipped. In some cases, interest can accrue with mortgage deferment as well, although that’s not always the case. The truth is, that even some lenders and banks appear to be using these terms interchangeably right now, so you should never assume the terms of your repayment. For this reason, when requesting mortgage relief it’s imperative to discuss with your lender exactly what your options are, and what will be required of you once you agree to the accommodation.
Similarly, if your regular monthly payments include escrow (payments made to cover yearly tax and insurance costs), you’ll want to discuss with your lender how those missed payments will be handled. Some lenders may require you to make up all missed escrow payments within a certain timeframe, and that could result in higher monthly payments once you resume making them.
Typically, a mortgage forbearance or mortgage deferment is recorded in your credit history and could negatively impact your credit score. However, the CARES Act has amended the Fair Credit Reporting Act to ensure that these mortgage relief options are not reported negatively to the credit bureaus if the accommodation is being made due to a COVID-19 related hardship. Under the CARES Act, lenders must report you as "current" to credit reporting agencies if this is the case. However, in order to have this protection, you must be current on your mortgage before you request the COVID-19 mortgage relief. If you are already past due when you request to delay your payments, your lender can continue to report you as delinquent. Once you bring your account current, the lender is required to stop reporting you as delinquent.
The critical thing to remember in all of this, is that communication with your lender is key. Never simply stop making your payments without discussing things with them first. Knowing all of the options available to you, and understanding everything that will be expected of you, will help to ensure that you can continue to afford your mortgage once the pandemic eases. Your home is likely once of the largest purchases you’ve ever made, and you don’t want to jeopardize it by hastily jumping into a forbearance or deferment plan that could come back to haunt you later on.