COVID-19 and the CARES Act
The COVID-19 pandemic has resulted in unprecedented financial losses for many. To date, the United States has shed more than 20 million jobs, and the unemployment rate is 14.7%. Subsequently, millions of homeowners are unable to make their mortgage payments. And, many must choose between paying their mortgages or going without the essentials. Thus, food security has become one of the topmost concerns after housing. To address these challenges, the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law on March 27, 2020. It provides relief through mortgage forbearance during COVID-19.
Below, we explain what mortgage forbearance is, the main points pertaining to financial relief under the CARES Act, and the steps to take to qualify for relief.
What is Mortgage Forbearance?
Forbearance is just that: an opportunity for homeowners to delay all or some of their mortgage payments for a stated amount of time. The critical points to understand are:
- Forbearance isn’t forgiveness.
- Any missed payments must be made good later.
- The CARES Act forbearance clause only applies to homeowners with federally-backed mortgages.
- Forbearance isn’t automatic; the borrower must apply for relief, and the company servicing the loan decides if the borrower qualifies.
- The forbearance period may last up to 180 days.
- Borrowers must get the forbearance agreement in writing to avoid any future misunderstandings.
- Approved homeowners may seek a further 180 days forbearance (making a total of 360 days) if they are still experiencing financial difficulties.
- How missed payments are repaid is decided by the company servicing the loan. Note that Fannie Mae doesn’t require missed payments to be made all at once after the forbearance period ends.
- The terms for repaying missed payments may be negotiable between the borrower and the service company.
- Borrowers don’t have to pay additional fees, penalties, or interest if they qualify for forbearance.
Eligibility for Mortgage Forbearance During COVID-19
Borrowers are eligible for mortgage forbearance if their loans are backed by one of the following:
- Fannie Mae (Federal National Mortgage Association)
- Freddie Mac (Federal Home Loan Mortgage Corporation)
- FHA (Federal Housing Administration)
- VA (The US Dept of Veterans Affairs)
- USDA (The US Dept of Agriculture)
Other lenders may also have mortgage forbearance options not covered by the CARES Act.
How to Tell If Your Mortgage is Federally-Backed
There are three easy ways to determine this if you aren’t certain.
- Look at your most recent mortgage statement.
- Go to the Mortgage Electronic Registration Systems website and look up your loan using your name and address, SS#, or mortgage ID number.
- Call your mortgage service company to get the name and contact information of the financial institution that owns your mortgage. This should be the last option because many service companies are experiencing high call volumes. So, you may face longer wait times.
What Are Your Options if Your Mortgage Isn’t Federally-Backed?
Although the CARES Act doesn’t address non-federally backed loans, you still have options. Most mortgage lenders take a long-term view of COVID-19. They generally prefer to avoid the direct and indirect costs of dealing with a mortgage default. So, there’s a high possibility your lender will offer you similar provisions for mortgage forbearance.
In addition, Governor Gavin Newsom recently announced a program where financial institutions will offer a 90-day forbearance for borrowers who have been negatively impacted by COVID-19. The California system includes a streamlined process for requesting forbearance. There’s also an option to seek further assistance after the initial 90-day period.
A Further Option for Mortgage Forbearance During COVID-19
A further mortgage relief program will soon be made available for homeowners. This mortgage deferral program is spearheaded by Freddie Mac and Fannie Mae. Starting in July 2020, lenders are encouraged to begin working with borrowers who have resolved a short-term hardship. Read the eligibility requirements of the payment deferral program here.
How Does Forbearance Affect Credit Scores?
The CARES Act amends the Fair Credit Reporting Act to protect homeowners. Essentially, if a borrower was up-to-date on mortgage payments before going into forbearance, then the lender must continue to report the borrower as “current.” However, if a borrower was already behind on payments before reaching a forbearance agreement, then the lender can report the borrower as “late” or “delinquent.”
Technically, forbearance shouldn’t affect your credit. However, it can affect your ability to purchase a new home or obtain a mortgage refinance. Here’s why: if you apply for a home loan and your mortgage forbearance appears on your credit report, it will almost certainly raise your debt-to-available-credit ratio. This can affect the strength of your FICO score and in turn, make lenders see you as a financial risk. Also, if you take the full 12 months of forbearance, you may have to wait a minimum period of two years before you become eligible for a home loan.
Steps to Take if You Can’t Pay Your Mortgage
The CARES Act helps mortgage borrowers to get through this crisis without undue hardship. It’s essential, if you do have a problem, to:
- Check as soon as possible whether you’re eligible for forbearance under the Act.
- Contact your lender or service company as soon as possible.
- Inquire what programs your lender offers if you’re ineligible for CARES Act mortgage protections.
- Access California relief initiatives such as the Pandemic Unemployment Assistance program if you’re a business owner or private contractor.
- Explain your situation to your loan servicer and agree on the terms of forbearance and repayment.
- Get everything in writing.
- Check your credit reports regularly at AnnualCreditReport.com to make sure they contain accurate information.
- Seek legal advice if you need to.
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