- Government programs beginning with the CARES Act made it easy to delay mortgage payments for up to 18 months.
- While a forbearance provides a payment holiday, the past due balances accrue.
- At the end of the forbearance, you must make arrangements to bring the account current.
- Not taking action could put your home at risk.
In March 2020, the CARES Act allowed borrowers directly or indirectly impacted by COVID-19 to request a forbearance without documentation. The mortgage servicer must also report accounts that were current before the crisis, as current during the forbearance, protecting your credit.
The CARES Act initially granted forbearance for 180 days, with the ability to extend the payment holiday for another 180 days, giving you a year without a mortgage payment. President Biden extended the forbearance for another six months for borrowers who were enrolled before June 30, 2020, and allowed borrowers to claim a forbearance due to COVID-19 until June 30, 2021.
What Happens When Your COVID Related Forbearance Ends?
While you receive a payment holiday, a forbearance is not a form of loan forgiveness. Interest continues to accrue on the outstanding balance, and you must repay the past due amount at the end of the forbearance. The result could mean owing thousands of dollars in back payments.
About a month before the forbearance ends, you should connect with your loan servicer to discuss the options available on your account.
What Are the Current Forbearance Options?
Repayment options depend on the type of loan you have. Loans not secured by mortgage buyers Fannie Mae and Freddie Mac could have different repayment options. However, FHA, VA, and other loans backed by Fannie Mae and Freddie Mac account for nearly 90% of existing mortgages. These loans generally offer the following options:
Lump-Sum Payment
Reinstatement of the loan requires you to make a single payment for the past due balance. At that point, the loan becomes current, and you begin making your regular payments as before.
Installment or Repayment Plan
When you cannot pay the past due balance in a single payment but earn enough to pay more than the previous monthly mortgage expense, you may qualify for a repayment plan. Your loan servicer will spread the missed payments over 12 months,allowing you to catch up on the account.
Payment Deferral
The repayment plan could add significantly to your monthly payment for the next 12 months. If you earn enough to restart payments but do not have enough income to pay a larger amount, a payment deferral may be the best choice. A payment deferral transfers your late balances to the end of the loan and allows you to resume payments at the same level as you were before the forbearance.
The deferred payment does not change the term of the loan and comes due when the loan matures. In some cases, the lender might require you to catch up on delinquent escrow payments through an installment plan. You can repay the debt as a balloon payment at maturity or when you sell or refinance the home.
Loan Modification
Modifying the loan allows the lender to change the terms of the mortgage without requiring you to reapply. The lender can change the type of loan by converting it from a variable to a fixed rate. You might also benefit from a lower rate and a longer term. The loan servicer can extend the repayment to 40 years, lowering your monthly payment.
Refinance
Refinancing the home requires you to qualify for a new mortgage, go through the loan process, and pay closing costs. However, if you plan to remain in the home and want to get cash-out, it is the only option that will allow you to gain access to available equity. A refinance could also lower your interest rate and extend the term for up to 30 years.
