Get the low-down on forbearance: all your questions answered

To say we’re all on rocky ground right now is an understatement — ‘unprecedented’ has become the word of the year. Many homeowners are looking for options to give them financial security and stability in a time where unemployment is rising, and paying your mortgage is becoming a scary prospect.  

In March, the CARES Act was announced, and with it a much-needed break for homeowners in the form of forbearance. But with a lot of confusing and often way too complicated pieces of info out there, it’s hard to know exactly what forbearance is, let alone whether it’s the best choice for you. 

We’ve rounded up some of the most brain-fry-inducing questions around forbearance to save you all the googling.  

So, what is forbearance?

Homeowners across the country were thrown into the unknown when COVID-19 brought with it mass closures, unemployment, and some real financial uncertainty. Paying for your Netflix account (and let's face it, the account 3 other people you know use) suddenly became the least of your worries, and making your mortgage payments took front and center for your wallet. 

Enter forbearance.  

Mortgage forbearance allows homeowners to effectively pause their mortgage payments for a set amount of time in the face of a crisis. Safe to say, the current global situation fits the criteria of crisis preeeeeeettty well. 

What does going into forbearance mean?

As part of the CARES Act, borrowers with government-backed mortgages who are facing financial hardship related to COVID-19 can get forbearance for up to a year. That’s double the length of the previous forbearance timeframe and means lenders can’t foreclose on your property. Being able to effectively pause your mortgage payments for up to a year comes with a sigh of relief for the roughly 3 out of 4 homeowners with government-backed mortgages. 

Got it. But what do I do about payments after ending my forbearance?

Homeowners across the U.S. may be going into forbearance to avoid financial hardship and ease financial stress, but the idea of repaying those missed payments tend to come with a stress-induced headache worse than what they started with.  

But there’s good news out there! The FHFA announced in May that government-backed lenders will include a number of payment options for those in forbearance. So what kind of payment options are out there? 

The lump-sum payment 

Government-backed loans either from lenders Fannie Mae or Freddie Mac, or FHA, USDA or VA-backed loans can be paid back in a lump sum payment. If all that money sounds like a lot at once, you’ve got options.  

Initially, homeowners leaning towards a lump sum payment had to pay the amount owing as soon as their forbearance ended. Understandably, that can be a scary option in financially fragile times. Thankfully, the FHFA announcement added a lump sum payment option to be paid when your home is sold, refinanced, or paid off in full — meaning your mortgage payments stay exactly the same as they were once they kick off again. Just don’t forget to save up that extra amount.  

A once-off payment not your thing? Payment plans are a popular choice to break up the cost into manageable bites 

Payment plans allow you to split out the cost of your mortgage payments missed and pay it back over a period of time. How long do you have to pay it off, you ask?  

Every lender is different (sorry to be vague — we know that’s the opposite of the point of this article) but most payment plans can be set for a maximum of 12 months.  

Rounding out the top 3 main payment options is a loan modification 

A loan modification is exactly what the name suggests. Your lender modifies the rate or term of your loan to make it more affordable for you; i.e. extending the term on its own, or lowering your rate and extending your term further.  

A big point to take into consideration is that a loan modification may be added to your credit report. It’s nowhere near as damaging as foreclosure but there’s no harm in checking with your lender about their details on this before your credit score takes a hit. You’ll also want to weigh up how much additional $$$ you’ll be paying in interest. 

What’s an example? Glad you asked (I know you didn’t but stick with me).  

If you originally had 20 years and $290k left on your loan and you were in forbearance for 12 months, your lender would extend your loan to 21 years. This would take your monthly payment from $1,608 to $1,552. Buuuuut, if you were paying 3.0% interest on that loan and kept your rate the same, that extra year would add $5,230 in interest.  

Quick and snooze-worthy maths class aside, it’s important to weigh your options, what you’re comfortable paying, and do a cheeky calculator check before diving into anything. 

Wait. What if my loan is with a privately-owned lender? 

Did you think we would forget about you guys? As privately-owned lenders ourselves, we know how confusing this whole government-backed vs not government-backed deal is. In fact, roughly 30% of mortgages in the US are with privately-owned lenders. That’s a lot of homes Googling what the hell is going on.  

To put it simply — privately-owned mortgages aren’t covered under the CARES Act. But before you reach for that second (or fifth) glass of wine, there’s good news. The majority of lenders are offering forbearance options to lenders, and flexible payment options.  

Okay, but how do I weigh up my options?

Forbearance seems to be the word on everyone’s lips, or furiously typed keyboards. In fact, as of September, roughly 3.5 million homeowners are currently in forbearance.  

If you’re thinking about entering into forbearance and pausing your mortgage payments, there’s a couple of steps to make the whole process less of a headache.  

• Do you know who your lender is? Freddie Mac and Fannie Mae have quick and easy loan look-up tools to check whether your mortgage is with them in less time than it takes to tell Netflix that yes, you are happy to keep binge-watching Schitt's Creek.
• If you don’t have a government-backed loan, you can check who you’re paying your mortgage to, your mortgage statements should have all their contact info
• Once you’ve got the who down — it’s time to figure out what options they have. Get in touch with your lender through their website or contact details and ask about their forbearance options. It’s a good idea to go two-birds-one-stone and ask about their payment options at the same time. Consider what payment style you’d be comfortable with and whether it’s doable.
• Being in forbearance should not negatively impact your credit score, but until April 2021 you can check your credit weekly — a nifty link to have on hand to make sure nothing is amiss
• Before you write this year's bills off, remember that this is forbearance — not forgiveness. That means those pesky mortgage bills (and the interest that accrues with it) will need to be paid at some point

It’s important to weigh up your current and future financial health to know whether entering into forbearance is the best answer for you. Toss around what you’re looking to achieve, and what your pay-back plan would be if you go ahead. 

If pausing payments doesn’t float your boat, taking advantage of record-low rates with a refinance could give your dwindling savings some more room to breathe too.