What To Know Before You Delay Payment

Michelle Black, Contributor
FORBES – Personal Finance

Millions of individuals and families across the country are facing financial hardships during the coronavirus crisis. According to the Pew Research Center, as of late March, nearly half of Americans considered the pandemic to be a major threat to their personal finances. It’s understandable that people are concerned. And the situation is escalating: Between March 15 and April 4, nearly 17 million U.S. citizens filed for unemployment benefits.

In response to these financial hardships, the federal government has announced plans that offer relief to many homeowners who aren’t able to keep up with their mortgage payments. Thanks to the CARES Act, you may be able to take advantage of up to 12 months of mortgage forbearance if your mortgage is federally owned or backed.

Yet putting off your mortgage payments may not be as helpful as it seems. In some cases, signing up for mortgage forbearance could potentially set you up for serious problems in the not-too-distant future.

Payment Forbearance Under the CARES Act

On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act) into law. Along with the stimulus checks currently being sent to many American citizens, help for small-business owners and other relief measures, a provision of the CARES Act also allows borrowers with federally backed mortgages to request temporary loan forbearance for up to 180 days. Borrowers also have the right to apply for an extension of another 180 days of forbearance.

Borrowers who wish to take advantage of the short-term payment hiatus must attest to their mortgage servicers that they are enduring financial hardship as a result of the coronavirus crisis. Once a borrower requests hardship forbearance due to the COVID-19 pandemic, the act requires the servicer to offer a CARES Act forbearance.

The CARES Act forbearance requirements apply to federally backed or owned mortgages; however, more mortgage relief options may be available, based on your state of residence or through independent offerings from your mortgage lender.

Potential Problems

The CARES Act calls on lenders and servicing companies to allow payment delays for up to 360 days on federally backed mortgages. Yet the CARES Act isn’t specific when it comes to what happens once the forbearance period ends. As a result, individual lenders and servicers are setting different rules about how borrowers must make up the delayed payments.

John Ulzheimer, an Atlanta-based credit expert formerly of FICO and Equifax, warns of the potential downside to signing up for a mortgage forbearance program: “If the lender or servicer demands that you pay back the deferred amount all at once or in an otherwise expedited manner, that could be impossible for the borrower.”

Unfortunately, having a mortgage servicer ask for a “balloon” payment once your forbearance period ends is a very real possibility. Borrowers from multiple national banks have reportedly been informed of the need to repay any delayed payments in a lump sum at a future date.

Some banks may be more generous when it comes to post-forbearance payment arrangements. In the end, it’s best to call your lender or mortgage servicing company to find out what solutions may be available to you. (Just be prepared to wait on hold, as most banks are experiencing unusually high call volumes at this time. Before you call, you may want to go online to see if you can begin the process via the lender’s website.)

The Consumer Financial Protection Bureau (CFPB) provides examples of some of the options you may encounter when you reach out to your servicer for a hardship forbearance:

–  Payments due immediately after forbearance. This option allows you to pause your mortgage payments on a temporary basis. However, you’ll need to pay everything back at once when the forbearance period ends.

–  Payment reduction due over 12 months. With this option, your servicer reduces your monthly payment amount for a period of time. (Perhaps your $1,200 mortgage payment could be cut down to $600 each month for a year.) Once the arrangement comes to an end, you will repay those “skipped” portions of your payments within 12 months. So, in the example provided, your post-reduction payments would be $1,800 per month ($1,200 + $600 = $1,800) for the next year.

–  Paused payments due at the end of the loan. Your mortgage servicer may allow you to pause payments for up to one year. Those delayed payments are added onto the end of your loan and extend your repayment time frame.

As you can see, some hardship programs are clearly better for borrowers than others.

Asking for a Mortgage Forbearance

Unlike the student loan relief provided for in the CARES Act, mortgage forbearance during the coronavirus crisis isn’t automatic. Forbearance isn’t available from every mortgage company either. If you need payment relief from your mortgage lender or servicer, you will have to ask. Follow these steps to ask for forbearance:

–  Find out which company services your mortgage. This information will be available on your monthly mortgage statement.

–  Research to learn if your mortgage is backed by the federal government. Your mortgage servicer can provide you with this information if you can’t find it on your own. Fannie Mae and Freddie Mac, who own or back close to 50% of the mortgages in the U.S., also provide online lookup tools you can use to see if either entity owns your loan.

–  Reach out to your mortgage lender or servicer to explain your hardship. Be prepared to answer questions about your income, expenses and assets (like the money you have in savings). If you’re experiencing a hardship due to COVID-19, you have the right to ask for a forbearance of up to 180 days on any federally backed mortgage. For private mortgage loans, you can ask your bank about available hardship options. It may also be helpful to research whether your state has specific mortgage relief provisions in advance, so you’ll be familiar with your rights.

–  Ask what happens when the forbearance period ends. At the end of your forbearance period, will you need to make up delayed payments immediately? Will skipped payments be applied to the end of your loan? It’s critical to gather these details upfront so you’ll know exactly what to expect.

–  Document everything. If your lender or servicer grants you a special payment accommodation, ask for a copy of the arrangement in writing. Store your documents in a safe place. In the event something goes wrong, you could need them to protect your credit from damage or, in extreme circumstances, to save your home from foreclosure.

How Will a Forbearance Affect Your Credit?

On a positive note, entering into a forbearance agreement with your mortgage lender may not affect your credit in a negative way, even though you’re delaying payments. A portion of the CARES Act amends the Fair Credit Reporting Act. The amendment instructs lenders to report that borrowers are “current” on their credit obligations when a special payment accommodation (like a forbearance) is in place specific to COVID-19.

There is, however, a notable exception to these special CARES Act credit protections. In the event that you’re already past due on a credit obligation before you request a payment accommodation, your lender can continue to report you as delinquent to the credit reporting agencies. You would need to bring your account current before the lender is required to stop reporting your account as past due each month.

If you enter into a forbearance agreement with your mortgage lender (or any other creditor), it’s imperative to review your credit reports often. Don’t just assume that your lender is following the new credit reporting guidelines. You need to verify that your lender is indeed continuing to report your account as current if you want to protect your credit during the coronavirus crisis.

Remember, you can claim a free copy of your credit report from Equifax, Experian and TransUnion once every 12 months at AnnualCreditReport.com.

Mortgage Payment Deferral

Another solution to help cash-strapped mortgage holders officially becomes available on January 1, 2021, although servicers are encouraged to begin evaluating borrowers as early as July 1, 2020: the payment deferral option. This program is being undertaken jointly by Fannie Mae and Freddie Mac at the direction of the Federal Housing Finance Agency (FHFA). (This payment deferral program does not apply to FHA, VA and Guaranteed Rural Housing mortgages.)

Borrowers affected negatively by COVID-19 may be eligible to take advantage of this new payment deferral option. Borrowers who can resume their monthly payments but can’t also afford to bring their mortgages current with a lump sum payment or a repayment plan may have the option to defer their past due balance (principal and interest) to whichever of the following dates takes place first:

–  The mortgage maturity date
–  The loan payoff date
–  Upon sale or transfer of the property
–  Since the program asks the mortgage servicer to complete the payment deferral in the same month that it determines a borrower is eligible, this relief could start rolling through later this summer, in advance of the January 1, 2021, requirement. 

Keep Making Your Payments If You Can

Federal and state governments are working hard to make mortgage relief options available to borrowers throughout the country. Yet the CFPB recommends continuing to make your mortgage payments if you can.

Ulzheimer agrees and cautions borrowers about the potential danger in trying to skip mortgage payments without a genuine need. “Don’t be tempted to use your current predicament as an excuse to request a forbearance,” he says. If you can continue to make your payments, Ulzheimer points out that you won’t have to worry about having to make a large payment or seeing your monthly payment increase just to get caught up on your loan later.