What should I do if I can’t pay my mortgage due to hardship?

The economic downturn triggered by COVID-19 is placing great financial strains on households around the World.  Many are finding it difficult to pay their monthly mortgages.  This guide offers some advice on potential steps that you may wish to take if you find yourself unable to pay your mortgage.

TEMPORARY RELIEF FOR FEDERALLY-BACKED LOANS UNDER CARES ACT

Right now, the Coronavirus Aid, Relief, and Economic Security, otherwise called the “CARES Act” is a relief package that provides forbearance on a federally-backed mortgage loan to homeowners experiencing financial hardship due to COVID-19. Through this Act, you can apply for a Forbearance Agreement.

* Forbearance Agreements

When asking for this type of financial aid due to COVID-19, you agree with your lender to hold your federally-backed mortgage payments for half a year (or 180 days), initially. This means that your payments would be suspended for this period and the lender won’t initiate foreclosure. It also implies that servicers can’t send negative records about the borrower to the credit bureaus.

To qualify for forbearance, your mortgage should be backed by one of these federal agencies:

• Fannie Mae

• Freddie Mac

• The Federal Housing Administration (FHA)

• The U.S. Department of Veterans Affairs (VA)

• The U.S. Department of Agriculture (USDA)

To request a forbearance agreement under the CARES Act, you should contact your Mortgage Lender or Servicer.  You should declare that your financial hardship was caused directly or indirectly by COVID-19.  You are not required to provide documentation to prove your financial hardship, but your servicer might want to know more about your situation to determine how much assistance to offer and how to resume payments after the crisis.  See “Prepare to Answer Questions from your Lender” below.

* What happens at the end of the Forbearance Agreement Term?

If this situation extends over the first 180 days, you can ask for an extension for another 180 day

At the end of the final Forbearance term, the borrower could:

  • Pay the paused amount in full.
  • Add an extra amount to your monthly payments until the total is repaid.
  • Complete a loan modification to, for instance, extend the term of the loan by the number of months you asked for forbearance.

Since May 2020, Fannie Mae and Freddie Mac (the Enterprises) made available a new payment deferral option for those that requested forbearance due to COVID-19. This option allows borrowers to make up with missed payments when they sell their home, refinance, or when the loan ends. Servicers will begin offering the payment deferral repayment option starting July 1, 2020. Check out the complete announcement at the Federal Housing Finance Agency.

To see if you qualify for this type of agreement, check out the Consumer Financial Protection Bureau website.    In any case, call your mortgage lender or servicer to discuss your options.

ONGOING RELIEF OPTIONS FOR ALL MORTGAGES – FEDERALLY AND NON-FEDERALLY  BACKED.

There are also ongoing measures to take if you are experiencing other causes of hardship, beyond COVID-19. Examples of these difficulties to pay include an illness or disability, unemployment, a divorce, or a natural disaster. In these cases, you could ask for a Repayment Plan or a Loan Modification.

* Forbearance 

We explained above how to apply for forbearance if you have a federally-backed loan. But you could also qualify for a forbearance if you have a private loan. Under this agreement, you would be able to suspend your mortgage payments for a limited period of time. You should call your lender or servicer to ask for the terms and requirements of these types of forbearances.

* Repayment Plans

Unlike forbearance agreements, repayment plans occur after you missed a few payments. If you weren’t able or didn’t know about forbearance agreements and you are behind with payments, this type of plan will allow you to add a fixed amount of money to your next payments until you repay what you owe.

After that, your monthly charges will remain as they were at the beginning.

* Loan Modifications

If you think you won’t be able to meet the full amount in your mortgage payments, this could be your best option. Instead of asking your lender for a forbearance agreement or a repayment plan, you could go for this permanent agreement. A loan modification allows you to cancel your debt at a more affordable rate or interest rate, or even to extend the term of the loan.

* Prepare to Answer Questions from your Lender 

When seeking a Forbearance, Repayment Plan or Loan Modification, be prepared to answer questions from your Lender such as:

  • Why can’t you pay?
  • If this situation is temporary or permanent?
  • How much is your income if there is any?
  • How much do you spend?
  • What assets do you own (including money in the bank)?

These answers to these questions will help your Lender determine what assistance to offer, and how to resume payments afterwards.

* Ensure you understand and agree to your new Payment Schedule before entering into a Mortgage Relief Plan

While your immediate concern may be on getting short term relief from payments, you should ensure that you understand and agree with your lender on how reduced or deferred payments will be made up. Certain servicers might offer you balloon paymentsotherwise called lump-sum payment, for instance, which means that you should pay the full amount owed, immediately upon the end of the forbearance. This might be something that will be very difficult to do.  Being offered this type of repayment doesn’t mean that you should accept it. You can negotiate to reach an agreement that you believe you will be able to successfully meet.

COULD A DEFERMENT OR FORBEARANCE HURT MY CREDIT SCORE? 

Applying for financial aid during the coronavirus pandemic seems crucial today, but you might be wondering if all these postponements won’t backfire and hurt your score. The short answer is No. At least, not directly.

The credit reporting agencies receive a special code from lenders when deferment or forbearance is due to a declared disaster. This means that now, as required by the CARES Act, this measure will not lower your credit score.

Nevertheless, there are a few things to take into account:

* One Missed Payment could be Detrimental

Keep in mind that being late or missing a payment before asking for deferment or forbearance could hurt your score. To be precise, if you decide to inform your lender of your situation after you missed a first monthly payment, this could be reported to the credit bureaus. If you wait longer, like 90 days, your loan becomes officially “delinquent”. Things get worse if you don’t report your financial difficulties for 270 days, as your account would be officially “in default”.

* The Age and Size of Unpaid Debt will Grow

Although not being able to pay due to the pandemic will not directly hurt your score, by taking a deferment or forbearance, your loan grows old and this eventually lowers your credit score. This postponement also causes the size of your loan to grow larger than the amount you borrowed, which in time negatively affects your score.

* The Size of Your Monthly Payments could Increase 

A private loan or a federal unsubsidized loan would continue to accrue interest during the payment postponement period. This would increase your loan balance after the deferment period ends, and ultimately have negative repercussions in your credit score.

TO CONCLUDE 

If you are facing financial challenges due to COVID-19 or another type of hardship, don’t wait until you are past due on your mortgage monthly payments. Call your mortgage lender right away. There may be a way to alleviate your particular situation without endangering your financial future.  You just need to find the one most convenient for you.

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