How Will Taking The COVID-19 Forbearance Affect My Mortgage Loan?
The economy has suffered due to COVID-19, but if you’re a homeowner who is experiencing financial hardship, mortgage forbearance may seem like a godsend, or is it?
Across America, 45 million families have filed for unemployment because of the coronavirus pandemic. Of those 45 million, 4 million homeowners have applied for mortgage forbearance, thanks to the CARES Act that was passed in March. But, what does that mean?
What does the CARES Act do for homeowners?
The CARES Act grants homeowners with a federally backed mortgage (USDA, FHA, and VA loans, for example) to ask their lenders to pause their mortgage payments up to 180 days (6 months), although most homeowners choose to apply for a 90-day period (3 months). They also have the option to apply for an additional 180 days.
To apply for forbearance, the homeowner must contact their lender and show the lender that they’re in a financial crisis due to COVID-19. The lender is required to offer forbearance as per the CARES Act.
How does the CARES Act help renters?
Homeowners aren’t the only ones who are granted reprieve under the CARES Act. Under the law, tenants living in federally-backed housing have been provided with a 120 day (4 months) eviction moratorium. This means their landlord cannot charge tenants late fees, penalties, or send an eviction notice until July 25, 2020. The law also stipulates that the eviction notice must be given to the tenant 30-days to vacate the property.
With that said, tenants who can pay the missed rental payments are more than likely able to stay in the home. In some cases, tenants can appeal to their landlord to make up some kind of payment plan.
What happens if I choose to apply for forbearance?
Homeowners who choose to apply for mortgage forbearance aren’t off the hook. Once the forbearance period has ended, homeowners will have to pay all of the missed payments at once. So, let’s say you choose a 90-day forbearance and your mortgage is $1,200.00 per month. At the end of the 90-day period, you will have to pay a total of $4,800.00 (3 months of missed payments plus the current month’s mortgage payment).
Can you imagine how much money a homeowner would have to pay if they applied for the 6 month option and asked for a 6 month extension? That’s $14,400.00 in missed payments (not including the current month’s mortgage payment).
Fortunately, homeowners do have options:
Payments are reduced for 12 months
With this option, lenders will accept partial payment (determined by the lender based on your needs) for a designated period. Once that period is over, the amount you didn’t pay will be tacked on to the next year’s monthly payments.
For example, if your monthly payments are $1,200.00 and it’s been reduced to $500 per month. The $700 you didn’t pay this year would be tacked on to next year, thus making your mortgage $1,900.00 for that year.
Loan is extended to make up for missed payments
Your mortgage lender may grant you forbearance under the stipulation that the missed payments are added to the end of the loan, thus extending the repayment time frame for an additional year.
Making the switch to homeownership
Buying a home during a pandemic (or any time really) is a huge decision that shouldn’t be taken lightly. However, as a homeowner, you have options when it comes to financial hardships like the ones we mentioned here, as well as refinancing and taking out a home equity loan while the interest rates are so low in order to repay the missed payments.
Renting is fine and well, but owning a home builds equity that you can draw upon should things go down the toilet. It’s something to think about.
For more on COVID-19 and real estate, check out HomeLight’s full report from their Q2 Top Agent Insights Survey.