On March 27, 2020, Coronavirus Aid, Relief, and Economic Security Act (AKA the CARES Act) was signed into law with the goal of providing relief for those affected by the Covid-19 epidemic. In addition to stimulus checks and small business loans, the CARES act allows homeowners to apply for temporary loan forbearance for up to 180 days and possibly extend forbearance for another 180 days.
Before we discuss what to watch out for, what exactly does forbearance mean?
Forbearance is when your mortgage servicer or lender allows you to temporarily pay your mortgage at a lower payment or pause paying your mortgage. You will have to pay the payment reduction or the paused payments back later. – Consumer Financial Protection Bureau
Should you apply for forbearance? Weigh the risks:
You’ll still have to pay your taxes and insurance. Many borrowers escrow (pay monthly with their loan payment and bank deposits into an account) their taxes and homeowner’s insurance. These still need paid even if your mortgage is in forbearance.
What are the terms? There is not much guidance on how banks are required to administer the forbearance.
So let’s look at 3 scenarios:
- Your bank allows you to pause payments for 180 days and then the full amount is due. Let’s assume your mortgage is $1000. That means on month 7 from the start of forbearance, you owe $6000 in payments, plus your $1000 for the current month.
- Your bank allows you to reduce your payments to an affordable amount, possibly 0 and then allows you to pay them back over time. Let’s say 12 months. So at the end of 180 days, you have to pay back $6000 (using the example above) and you have 12 payments to do it. Your mortgage payment is now $1500 for the next 12 months.
- Your bank allows you to pause payments for 180 days and then you tack that amount on the end of the loan either by extending the mortgage or with another loan. This may seem like a better option but remember that you are still paying interest on all the funds even in forbearance. This could amount to thousands and thousands of dollars over the life of your loan.
Will this affect your credit? Under the CARES Act, lenders are obligated to report your loan as current while in the 180 day forbearance period. That said, once that period has elapsed and your payments are now due, any missed payments will be recorded. Please make sure you are prepared when that time comes.
The bottom line is, if you can make your payments, it’s in your best interest to do so. If not, make sure you weigh the benefits and understand all the terms and conditions. We highly suggest talking to a mortgage professional before you sign off on anything.