Coming Out of Covid Forbearance

During COVID, several federal and state programs were put in place to protect the credit of borrowers. The purpose was to prohibit a mass default on mortgages and student loans. Forbearance is a temporary pause on loan payments or an agreement on partial payment. Simply, lenders offer debtors repayment relief. In 2020, over 4.5 million government-funded mortgages were in forbearance. That does not mean those payments have gone away. Those lenders have extended the repayment period without dinging your credit.

Deferment on a mortgage or student loan means the payments missed during forbearance are shifted to the end of your loan. Some private loans may defer them as a balloon payment at the end of the loan term.

Though it sounds like the relief is one-sided, it’s not. In the case of mortgages, foreclosure is expensive for lenders. Banks almost always end up taking a loss. Forbearance is a way to avoid expense. They don’t want to see a repeat of the foreclosure epidemic from 2008-2010.

What is Forbearance?

Forbearance works differently with loans in the public and private sectors. Some federal loans are guaranteed by the government but serviced by banks.

Multiple federal agencies offer mortgages. They include VA, Federal Housing Administration, USDA, and Native American Direct Loan (NADL). Freddie Mac and Fannie Man loans have suspended payments for 12 months and waived penalties and fees for late payment. Borrowers cannot be forced to repay what they owe in a lump sum. The same holds true for USDA loans, which extended the forbearance period to August 30, 2021. The VA and NADL Loans did as well.

Private lenders like banks are not required by law to offer forbearance options. But the government’s moratorium on foreclosures was a big incentive for providing consumers with options. Most banks first offered a three-month forbearance but many have now extended it to a year. Bank of American only offers a six-month forbearance and Key Bank lists their term as Indefinite.

Each bank offers its own repayment options, but none are limited to one lump sum repayment. They offer plans that add-on to your existing mortgage payments. Payments can be deferred to the end of the loan. You can choose a reinstatement plan to bring your mortgage up to date with a lump sum payment. There is plenty of fine print to read through. Some people can end up digging themselves in a deeper hole.

Just FYI, some banks have forbearance programs for credit card debt. But it’s unusual for people with poor credit histories to get it. If you were a poor payer before COVID, you probably aren’t going to get a lot of sympathy during COVID.

(Read: Is Buying a House with Cash Better than Having a Mortgage?)

How Does Forbearance Affect Your Credit?

It goes without saying if you’re late on your mortgage payments or skip one, your credit score is going to take a hit. Unfortunately, the forbearance options came a little late for some people. If you missed payments before you got into a program, your credit score was affected. If you get in a forbearance plan, you can see if the lender might help you can get it removed. But don’t count on it.

The CAREs Act gives automatically offers a  90-day grace period that protects your credit score. Lenders who are participating have maintained that approach throughout the process. As long as you followed the plan, your credit should be fine. That changes on September 1st, 2021. If you come off forbearance and can’t maintain your payments, your credit score is vulnerable.

Student loan payments are part of your credit score. Federal student loans normally wait for 3 months before reporting missed payments. Private student loans report after 30 days. Both loan providers will attach late fees when a payment is missed. Federal loans go into default after 270 days – that delinquency stays on your credit report for 7 years.

As of 2019, Experian reports 12% of student loans are in default. With the total student loan debt at $1.7 trillion in 2020, that’s no small chunk of change. But if you have government loans, there are two forbearance programs to help. The first is optional for lenders, the second is mandatory.

To be eligible for the optional plan, the borrower must have changes in income, large medical bills, or other financial difficulties. Payments may be suspended for up to a year, but interest continues to accrue. Mandatory forbearance happens when your loan payment exceeds 20% of your income. Medical and dental students enrolled in a residency are eligible. Members of the National Guard, AmeriCorps volunteers, and some teachers also qualify.

The CAREs Act ordered a six-month moratorium on student loan payments, without reporting to the credit bureaus. Just a note, Great Lakes Higher Education Corp reported over 5 million borrowers during that period. Check your credit report. If they were your lender, you may see false reports. If so, call them at 800-236-4300 to work on getting it removed.

When Forbearance Ends

What happens with a forbearance term concludes? The obvious answer is that your loan payments resume.

Understand that though your payment has been paused, the interest on your loan continues to accrue. The CAREs Act prevents loan servicers from charging extra interest. But the standard interest rate on the loan continues while payments are paused.

Roughly 90% of American mortgages run through Fannie and Freddie Mae. But the loans are serviced by banks. Each lender provides its own repayment plan for forbearance. Be very careful when making your choices:

  • Don’t agree to add extra money on top of your monthly payment unless you are sure you can handle the increase.
  • Check the details of the deferment option. Some lenders don’t add the payments to the term. They segregate them and you get a balloon payment before you can close your loan.
  • You may also be eligible to refinance your mortgage or set up a loan modification.

If you need more time to avoid default and have a loan from Freddie or Fannie Mae, the VA, HUD, or USDA, you may be able to get an extension. Three-month extensions for up to 18 months are possible. The eligibility for Fannie Mae and Freddie Mac requires a forbearance start date of February 2021. The other federal programs start from June 2021.

These extensions are not guaranteed. The programs will be overcome with applicants. Borrowers need to be proactive and push to get the help they need. Do this as soon as possible if you haven’t recovered financially.

COVID-19 FHA-HAMP programs encourage lenders to mitigate potential losses to homeowners. One option is the National Emergency Standalone Partial claim from HUD. This plan places up to 30% of the mortgage’s unpaid balance in a separate lien. The lien is only payable at the end of a mortgage when owners sell or refinance. Again, be proactive. Reach out immediately if you need help.

As of September 1, 2021, the moratorium on forecloses will are lifting. Lenders are required by the Consumer Protection Agency to help borrowers avoid default. But they can begin foreclosure proceedings. The new rules include a streamlined loan modification process for homeowners who can’t refinance.

(Read: When to Buy a House: Is Now the Right Time?)

Refinancing

Refinancing a mortgage means you replace your old loan with a new one. Refinancing your loan may allow you to take advantage of the lower rates, shorten the term or reduce the monthly payment. Homeowners who have been paying off a 30-year mortgage need to think carefully. The interest on your loan reboots. It may cost you more than your lower payment is worth.

Borrowers who are in forbearance, or have just come out of it, can refinance their mortgage. This is for people who made their mortgage payments but use forbearance as a “just-in-case” measure. They can also sell the house and buy a new one at any time.

Borrowers who missed payments are eligible to refinance three months after forbearance ends. They must make three on-time payments. At that time, they can sell the existing home and buy another. If you had a federally backed loan, forbearance allows homeowners to miss mortgage payments for up to a year. That said, the bank servicing the loan may have different criteria.

Loan Modifications

A loan modification is a revision of your existing loan. It’s not the same as refinancing. Your current loan is not replaced – it’s modified. A loan modification due to a lack of payment will affect your credit score.

Loans are modified to help struggling homeowners get on a payment schedule they can afford. The term of your loan might increase so the monthly payment is lower.  It’s possible to get a new lower interest rate, but that will depend on your payment history. If you have an adjustable-rate mortgage, you may be able to switch to a fixed rate.

When you’re in a forbearance plan, one month before it ends, you’ll hear from your lender. You don’t have to repay all your payments in a lump sum. One of the options available should be a loan modification. A  loan modification will have a probationary period. You need to make those payments, on time for three months before the modification is permanent.

The FHA HAMP program offers a loan modification plan too. It’s an option on its own or with a combo deal with the partial claim described above. If your loan is guaranteed by Fannie Mae, you can take advantage of the Flex Modification plan. To see if your loan is owned by Fannie Mae, use this search.

The End of Forbearance

 With the foreclosure moratorium ending in two months, homeowners who need more help have to step up now. After everything you’ve been through, it would be devastating to lose your home. If you haven’t fully recovered financially from COVID, focus your energy on getting additional help. Remember, when your forbearance term is up, there is no more leniency on missed or late payments. The pandemic has been bad enough without destroying your credit.

Facts for Consideration

Keep these in mind as you move forward.

  • No lender can force you to repay what you owe in a single lump sum.
  • If you need an extension, the time to request one is now.
  • The government requires lenders to offer loss mitigation options via the HAMP program. But all borrowers may not be eligible.
  • Lenders learned from the foreclosure crisis of 2009. They want to keep people in their homes whenever possible.
  • Your credit score should not be affected by mortgage forbearance. It will be affected if you don’t make timely payments when it ends.
  • Make sure you know the terms of your repayment plan.
    • Add on to your existing payment
    • Pay in one lump sum
    • Defer the payments and extend the loan term
    • Defer the payments to a balloon payment at the end of the loan.
  • If you’ve kept up your mortgage payments during forbearance, you can refinance your loan, sell your house and buy a new one.
  • If you missed payments during forbearance, you can still be eligible. Three months after forbearance ends make three on-time payments. Then you can apply to refinance.
  • Student loan forbearance can be either optional or mandatory on government loans. There was a federally mandated moratorium on payments. Check your credit report to make sure you weren’t penalized for non-payment.

It’s time for everyone to get clear of the coronavirus pandemic. Take full advantage of forbearance – protect your credit, save your home and get on with life.

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