First, what is mortgage forbearance?
Forbearance is when your mortgage servicer or lender allows you to temporarily pay your mortgage at a lower payment or pause your mortgage. You will have to pay the payment reduction or back pay the paused payments later.
How does forbearance work?
Lenders want to get paid, but they also want to avoid foreclosure as much as the homeowner does. Payment relief can be flexible. This is how it works:
- Borrowers must request forbearance before they stop making payments.
- Qualifying can be easy. Most lenders don’t demand proof of hardship.
- There’s no penalty. You don’t have to worry about missed payments during your forbearance period affecting your credit score or accruing fees.
- Payment will still be due. Forbearance pauses extend the length of your loan. Your payments will be paused, but you will pay them back during an extended term of your loan. Or you can opt to pay a lump sum at the end of your forbearance period.
What is the latest news on forbearance?
Many furloughed and laid off employees took advantage of penalty-free mortgage forbearance when the COVID-19 pandemic caused the market to crash. In fact, more than 2.5 million American homeowners stopped paying their mortgage in 2020.
Experts believe this free pass will soon end, but will most likely be a non-issue for homeowners. Economists believe the end of forbearance will be a non-event compared to the flood of foreclosures that defined the Great Recession.
This is largely due to rising home prices as a result of the coronavirus pandemic. Homeowners who find themselves unable to pay their mortgage when their forbearance period ends will likely be able to sell their home for profit rather than go into foreclosure.
Thanks to equity, struggling homeowners will have options. Experts described this outcome as, “not great, but less terrible than letting the bank take and sell the home.”
With the housing market still hot due to strong demand, short supply, record low mortgages, and high home prices, homeowners will have a solid buffer to easily absorb modest home price declines. However, experts do not have any reason to believe that home prices will fall anytime soon. Another upside to the end for forbearance for borrowers.
Did Covid-19 effect forbearance Laws/Packages?
Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) last year. This act includes generous terms for mortgages: Borrowers can miss up to a year of monthly payments, so long as their loans are held by Fannie Mae or Freddie Mac or issued by the Federal Housing Administration, or the U.S Department of Veterans Affairs.
Borrowers can ask for a 180-day break from payments, when that period runs out, they can ask for an additional 180 days of forbearance.
Congress didn’t address non federally-backed loans, however many private lenders voluntarily extended 180 days of forbearance to those borrowers not covered by the CARES Act.
Another feature of the latest forbearance packages as a result of COVID-19 is: when the payment break ends, borrowers don’t need to come up with a lump sum, they instead just resume payments. The unpaid balance is tacked onto the end of the loan, extending the loan period with no penalties.