Mortgage Forbearance: CARES Act & When It Ends

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Mortgage forbearance allows borrowers to delay their mortgage payments, reduce them, or pause the payments for a certain period of time when they are facing financial difficulties and their options are limited.

What is a Mortgage Forbearance?

Borrowers who are experiencing unexpected financial hardship may be eligible for mortgage forbearance. Mortgage forbearance pauses or reduces your mortgage payments for a certain period of time. At the end of this period, you are obligated to pay the suspended amount in full as well as continue making your regular mortgage payments. Mortgage forbearance is one of the loss mitigation programs available to homeowners during pre-foreclosure.

Reasons why someone may be granted mortgage forbearance include losing their job, getting divorced, getting their hours reduced, getting hit by a natural disaster or other circumstances that lead to borrowers not being able to afford their monthly payments.

Mortgage forbearance can reduce your credit score only if the lender reports it to the credit bureaus. However, depending on the circumstances, your credit score may not be affected if the reason for entering forbearance include cases such as a natural disaster.

How does Mortgage Forbearance Work?

The process of mortgage forbearance and how you can apply for it can be summarized in the following 6 steps:

1. Contact mortgage servicer

   For starters, you would need to contact your lender as soon as you realize that you may not be able to make your next monthly mortgage payment. By contacting the lender earlier on, you will allow yourself time to apply for forbearance, submit the necessary documentation and hopefully get approved.

2. Explain your financial situation

   You will have to explain to the mortgage servicer how your financial circumstances have changed and why you are not able to make the monthly mortgage payments. The lender will typically want to know whether this financial hardship is short-term (less than 6 months) or a long-term one (more than 6 months).

3. Answer questions regarding your forbearance request

   The mortgage servicer will ask you specific questions about whether you would be able to make a partial monthly payment at all during your forbearance period. This will determine whether your payments will be paused altogether or not. This is also the time when you can tell the mortgage servicer how many months would you require for your mortgage payments to be adjusted.

4. Submit the required documentation

   You will also have to support your argument with documentation that proves that you are going through financial difficulties which make it impossible for you to be on track with your payments. This documentation can include recent bank statements, pay stubs, etc.

5. Wait for a decision on your forbearance request

   After discussing your situation, your lender will determine if you are eligible for forbearance or not and for how long. If you are approved, the lender will send you an agreement regarding the terms of this arrangement. On the other hand, if you are declined, you can appeal the decision within 14 days and provide more information to help reverse the decision.

6. Fulfill the terms of the agreement

   It is important to understand that these payments are not forgiven and you will still owe the amount to the lender after your forbearance period ends. This can even come in the form of extra interest on your home loan.

Repayment Plans after Mortgage Forbearance

After your mortgage forbearance period ends, you will have to pay back the missed payments or the reduced payments in full to your lender, as well as continue to make the regular monthly mortgage payments. There are a number of repayment plans that you can follow once the forbearance ends. These include:

1. Making a full one-time lump sum payment - If you have the financial means, you can certainly make a lump sum payment to pay back what you owe the lender for the forbearance period. However, lenders are not allowed to require you to do this.

2. Lengthen the mortgage term - Under this repayment plan, the mortgage payments you have missed would be added at the end of your mortgage term. Therefore, you will end up paying off your mortgage after a longer period of time.

3. Make payments in between - You can choose to make payments during a 3 to 12 months period to cover for the amount owed during the forbearance plan. This is of course, on top of your regular monthly payments.

4. Defer payment - Under this option, the lender will let you pay the amount you owe when you either sell the house, refinance your mortgage or simply pay it off at the end of the mortgage’s term.

5. Make a change to the loan agreement - Sometimes, lenders may agree to change the terms of your loan so that you can afford making your mortgage payments. A possible modification could be a lower mortgage rate.

Refinancing after Mortgage Forbearance

While you are not allowed to refinance your mortgage while you are under mortgage forbearance, you can definitely choose to refinance after your forbearance has expired. If you can find a loan with better terms such as lower interest rate and extended mortgage term to lower your monthly payment, then refinancing may be the right option for you.

However, it is important to note that you are probably not going to be able to refinance your mortgage exactly after your mortgage forbearance period has ended. Lenders for most types of loans such as conventional loans, FHA loans and USDA loans require you to make 3 consecutive payments after your forbearance period ends. VA loans, on the other hand, are more lenient and do not require you to wait for any specific period after your mortgage forbearance expires.

The CARES Act

The CARES Act or the Coronavirus Aid, Relief, and Economic Security Act, was passed in March, 2020 in the U.S. as a response for the economic fallout caused by the pandemic of COVID-19. Under this act, borrowers of government-backed mortgages, such as FHA loans, VA loans and USDA loans, are eligible to be approved for a mortgage forbearance period of 6 months and can request an extension for another 6 months. Home loans owned by Fannie Mae or Freddie Mac are also eligible for mortgage forbearance under the CARES Act.

Since many people lost their jobs during the pandemic, got their hours reduced or had additional medical expenses, it is understandable that borrowers may have been unable to meet their mortgage obligations. This is why many lenders of other loans, not part of the CARES Act, also loosened up their requirements for mortgage forbearance during the period.

When does mortgage forbearance end with the CARES Act?

As of recently, the protection program of forbearance is set to end on September 30, 2021. The program was first set to expire on Dec 31, 2020, then on March 31, 2021 and then June 30, 2021. It is important to understand that your mortgage forbearance will end 360 days after the period of forbearance begins and you are permitted to request forbearance until the current deadline of September 30, 2021.

Can I get a forbearance extension?

Yes, you can extend your mortgage forbearance if you currently have either a conventional loan or government-backed loan such as an FHA, VA or USDA loan. You can request a maximum of two additional 3-months extensions, or a total of 6 months. This means that, under the CARES Act, it is possible to get a maximum of 18 months of mortgage forbearance. However, it is important to note that the specific lender you are working with would still need to approve your mortgage forbearance extension and make sure you qualify for it if you meet certain requirements. Also, remember that mortgage forbearance does not extend automatically and you would have to request your mortgage servicer for one.

How can I get a mortgage forbearance extension?

A mortgage servicer is supposed to contact you 30 days prior to your mortgage forbearance period ends and discuss the repayment options with you. However, if you know that you will need an extension, do not wait for them to contact you and reach out to them instead. This will allow you to have more time to prepare for what’s going to happen after the mortgage forbearance period ends.

Will my credit score be affected under the CARES Act?

Mortgage servicers will need to contact the credit bureaus and report your pandemic-related mortgage forbearance so that it doesn’t affect your credit score in any way.

Mortgage Forbearance - FAQs

Can I buy a house after forbearance?

It used to be more difficult for homeowners who had gone through a mortgage forbearance in the past, to buy a new house through a mortgage. This was because lenders would impose more strict financial requirements for these homeowners, which would make them harder to qualify for. However, after the COVID-19 pandemic, lenders realized that many creditworthy borrowers were put under extreme financial circumstances that were unpredictable and led them to mortgage forbearance. Therefore, the lenders have loosened the requirements for borrowers who were pushed into forbearance because of the situation caused by the pandemic.

Can I end the forbearance plan early?

Yes, if you are back on track with your finances and believe that from now on you will be able to afford making your monthly mortgage payments, you can end the forbearance plan early. To do this, you would have to notify your lender of your improved financial circumstances and request them to end forbearance. It is important to be certain that you are not going to need your forbearance plan anymore before deciding to end it.

What if I can’t afford my mortgage payments even after forbearance ends?

Unfortunately, if you cannot afford to make your monthly payments even after your forbearance ends, your options are very limited. You would either have to sell the home, probably as a short sale, foreclose on the home or do a deed in lieu. In a short sale, you would probably have to sell your home for less than what it is worth leading to the lender not receiving the amount they are owed in full by the borrower. On the other hand, with a deed in lieu, the borrower explains to the seller that they will no longer be able to afford their mortgage payments and hand over the property to the seller amicably. Out of the three options, foreclosure is the one that will hurt your credit score the most.

How does mortgage forbearance affect your credit?

Mortgage forbearance reduces your credit score only when the lender reports your delinquency to the credit bureaus. However, this decrease in credit score is still less than what it would be if you were to default on your mortgage. Moreover, in events such as natural disasters, your credit score will probably not be affected by mortgage forbearance.

Can I sell my house under mortgage forbearance?

You can sell your home after your forbearance ends. In this case, some of your proceeds would be used to pay off your mortgage first, including the missing or reduced payments during the forbearance period.

Is mortgage forbearance and deferment the same thing?

Mortgage deferment or deferral is one of the ways in which you can pay your lender what you owe back after the forbearance period ends. With a deferral, you would pay your mortgage payments as a lump sum at the end of your loan term. However, there are other ways in which you can pay back your missed or reduced payments that do not include a mortgage deferral.

Is mortgage forbearance a good idea?

If you are facing financial difficulties and are not sure if you will be able to make your monthly mortgage payments, then mortgage forbearance is a good idea. Remember that if you miss even more than one mortgage payment, you may risk defaulting on your loan and face foreclosure after. Mortgage forbearance leaves you some space to re-evaluate your financial situation and figure out how you will proceed with your mortgage in the short and long-term.