When Mark Miano’s real estate business slowed following the coronavirus shutdown, he called his mortgage company to ask about delaying payments for his home in Los Gatos, California.
“All they offered was a 90-day forbearance and a balloon payment at the end,” he said.
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“How am I supposed to do that? If I have no income, which is why I’m trying to defer payment, how am I supposed to come up with it all at once at the end? That’s out of the frying pan into the fire.”
Forbearance – or the process of delaying mortgage payments for a given period of time – is typically allowed only on a case-by-case basis for homeowners experiencing hardship or after a natural disaster. But now the option is much more widely available.
Under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, homeowners affected by coronavirus with federally backed loans can delay or reduce payments for up to a year. Those who don’t have government-backed loans may also get forbearance, at the discretion of their lender.
Although there are 3.5 million loans already in forbearance, according to the Mortgage Banker’s Association, other homeowners are passing on the deal because they’re being told they’ll have to make enormous payments in just a few months.
But that’s not necessarily the case. Here’s what you need to know.
Lump sum repayment is not required in forbearance
Of the millions of people who called servicers about forbearance over the past month, many came away understanding that when their time was up, the entire deferred amount would have to be paid in one lump sum, said Christina Tetreault, manager for financial policy at Consumer Reports.
“It wasn’t unique to one servicer and it wasn’t accurate,” she said. “Homeowners should be given a range of options.”
She said some homeowners were not clear if they have a mortgage that qualifies under the CARES Act, while others may be given incomplete or inaccurate information by their lenders.
While the CARES Act requires some servicers to grant forbearance, it does not specify how repayments are to be made.
But federally backed mortgage programs Fannie Mae and Freddie Mac have their own guidance, which states that lump sum payments are not required in forbearance. Because of the confusion among borrowers, the mortgage giants recently issued statements for clarification.
“At the end of the forbearance plan, the homeowner will be provided with several options from their mortgage servicer for making up the missed payments and will not be required to pay everything back all at once,” according to the Fannie Mae statement.
If you were told the only payment option from your lender was a one-time payment, call again. Miano called his lender again this week, a month after the first call inquiring about forbearance. This time the offers were very different, he said.
“What they are offering now could certainly help borrowers that get laid off or don’t have the money to make the mortgage payment,” he said.
Know your payment options
For loans covered by the CARES Act, which include federally backed loans, servicers are supposed to contact homeowners about 30 days before the end of the forbearance period to determine options, which may include a balloon payment, or paying all of your missed payments at one time if you can. Since most people won’t be able to do that, other options are available.
You may be able to spread payments out over a period of months, tack them on as additional payments at the end of your mortgage, or even receive an extension of the forbearance period if needed.
During the forbearance period, servicers will typically evaluate your situation to determine your ability to pay. If the servicer determines that you will be able to pay your debt after a hardship period, even if it needs to be a lower monthly amount because of a lasting income change, a modification to the loan terms may be made.
A loan modification changes the existing terms of the loan by some combination of reducing your interest rate, extending the life of the loan or even changing the type of loan.
To better understand the options you should be given when you call your servicer, Fannie Mae has an example forbearance script from a servicer.
But in order to qualify for forbearance with such repayment options, you need to have a federally-backed loan. You can confirm your loan is backed by the government using loan look-up tools at the Fannie Mae or Freddie Mac websites. Or you can use the look-up tool at Mortgage Electronic Registration Systems.
If your mortgage is not government backed, you are not covered by the CARES Act protections, but you can still reach out to your loan servicer and ask for forbearance and repayment options if you are unable to pay. The Consumer Financial Protection Bureau and other regulators have encouraged companies to work with borrowers who may be unable to meet their obligations because of the effects of coronavirus.
Kicking the problem down the road
While a forbearance is a temporary improvement now, it could cause larger problems later, said Deeksha Gupta, assistant professor of finance, Tepper School of Business at Carnegie Mellon University.
“Forbearance is a sensible thing to do now because you may be able to avert a foreclosure in the short run,” she said. “But if you don’t have a way to pay the mortgage long term, there will be a problem.”
With so much uncertainty about how long you may be out of work, Gupta says it might be too early for many people to know what they will and won’t be able to afford months from now.
“We know that we need some sort of forbearance, otherwise we will see wide scale defaults,” Gupta said. “But what will employment look like? What types of payments can people make on their mortgage? It is hard to enter into a loan modification right now and know what it means for you later.”