The COVID-19 recession shriveled the bank accounts of countless homeowners. If you entered mortgage forbearance last April or May because of the pandemic, you have plenty of company: Almost a million people will reach their 12-month forbearance anniversaries in those months of 2021.
In total, more than 2.5 million remained in forbearance plans as of late February. If you’re in that number, here's what to know as you approach the initial forbearance deadline. Your options may include extension of the forbearance, repayment of the past-due amount or even resuming your old payments as if forbearance hadn't happened.
COVID forbearance can be extended
As your initial 12-month mortgage forbearance expires, you may ask to extend it by three months. Then, if you need to, you can ask for another three-month extension. In total, your forbearance can last 18 months.
Extensions won't be given automatically. You have to call or respond to your mortgage servicer (the company that processes your monthly payments) and ask.
The option to extend forbearance to 18 months is available for most mortgage types, depending on when the initial forbearance started:
- For loans securitized by Fannie Mae or Freddie Mac, you must have entered forbearance by Feb. 28, 2021.
- For mortgages insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs and Department of Agriculture, you must have entered forbearance by June 30, 2020.
About 70% of home loans fall into the above categories. They are covered by government regulations designed to protect borrowers. Mortgage companies might find these regulations burdensome, but you might find them a lifeline.
About 30% of mortgages don't have to comply with these regulations. These are largely jumbo loans, which exceed conforming limits; mortgages that banks originated and kept on their books; and nonqualified mortgages, many of which are underwritten with alternative documentation or have debt-to-income ratios over 43%.
Although servicers of these loans aren't required to offer forbearance, some do. When ready to exit forbearance, these borrowers must negotiate with their mortgage servicers.
The Department of Housing and Urban Development vets housing counseling agencies. You can contact a HUD-approved agency for advice before or after getting in touch with your mortgage servicer, regardless of loan type.
What happens when forbearance finally ends?
When you entered forbearance last spring or summer, you might have heard that you would have to repay the past-due amount upon leaving forbearance, either in a lump sum or through additional monthly payments.
If the prospect of continued financial stress made your heart pound, the thump-thump-thump caught the attention of folks in Washington. They realized it was unrealistic to expect you to find thousands of dollars at the bottom of an empty checking account.
Acknowledging that reality, regulators came up with an additional way to come out of forbearance: deferral. If you can't afford to pay a big lump sum or higher payments each month, deferral means you might be able to return to the same monthly payments you had before.
But in general, options for exiting forbearance vary, depending on your financial situation and the type of mortgage you have.
If your loan is backed by Fannie Mae or Freddie Mac
If you have enough in savings to comfortably repay the past-due amount in one payment, well, bless your heart. Go ahead and pay up. Your loan will be reinstated and you’ll move forward as if forbearance never happened.
If you can afford to pay an extra few hundred bucks each month until you're caught up, you may agree to a repayment plan. It works this way: Let's say you've skipped $3,000 in mortgage payments. Now your income is restored, and you can afford to add $250 to each monthly payment for the next 12 months. At the end of this repayment plan, you would have paid back the $3,000. Then you would go back to your regular payments.
COVID-19 PAYMENT DEFERRAL
What if you and the servicer look at your income and expenses and decide that, while a repayment plan would be unaffordable, you could resume making your pre-COVID monthly payments? In this case, you might be eligible for a COVID-19 Payment Deferral.
With the payment deferral, your past-due amount is pushed back to the end of your mortgage term and added to your last scheduled payment. You return to making your regular payments. You'll repay the past-due amount when you sell the home, refinance the mortgage or reach the end of the mortgage term.
If a COVID-related financial hardship permanently hampers your ability to resume making the pre-pandemic payments, the servicer may offer to modify the loan to reduce the monthly payment. With a loan modification, the servicer might extend the mortgage term, reduce the interest rate, forgive some of the principal, or some combination.
If your mortgage is an FHA loan
COVID-19 STANDALONE PARTIAL CLAIM
When forbearance ends on a Federal Housing Administration-insured mortgage, the primary option is to resume making ordinary, pre-COVID payments. The past-due amount is set aside as an interest-free second mortgage that doesn't require monthly payments. This past-due amount is repaid when you sell the home, refinance the loan or reach the end of the mortgage term. Your mortgage servicer might call this a deferral, and the FHA calls it a COVID-19 Standalone Partial Claim.
COVID-19 OWNER-OCCUPANT LOAN MODIFICATION
If you can't afford to resume your pre-COVID payments, the servicer will evaluate you for a COVID-19 Owner-Occupant Loan Modification. With this loan modification, the servicer would make the payments affordable by reducing the interest rate and stretching out the loan term.
There are two other options if these two won't work:
- The COVID-19 Combination Partial Claim and Loan Modification, for borrowers who don't meet eligibility requirements for the first two options.
- The COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation, for borrowers who can't afford the payments under any other option.
If your mortgage is a USDA loan
When a forbearance ends on a Rural Development loan guaranteed by the Department of Agriculture, the first option is a repayment plan, in which you pay extra each month for a specified period until you've paid back the past-due amount.
If a repayment plan won't work, you may have the option of a term extension. The USDA offers two types of term extensions. With one, you pay extra each month for five years to pay off your past-due insurance and property taxes. In addition, your loan term is extended by the number of months that you missed payments.
If you can't afford five years of extra payments, the other type of term extension may be an option. This one is a loan modification that adds up everything you owe and turns it into a new, up-to-30-year mortgage with an interest rate reduction.
MORTGAGE RECOVERY ADVANCE
This deferral program is similar to the FHA's Standalone Partial Claim. You resume the old monthly payments. Meanwhile, your past-due payments are set aside until you sell the home, refinance the mortgage or reach the end of the mortgage's term. You don't accrue interest and you don't make monthly payments on this past-due amount.
If your mortgage is a VA loan
The Department of Veterans Affairs is stingier to borrowers coming out of forbearance than the FHA and USDA are to their borrowers. The FHA and USDA may defer your past-due payments interest-free until you sell the home or refinance, but the VA guarantees no such option.
The VA has proposed a deferral program, but it would charge interest, and the past-due amount would have to be repaid within 10 years. The proposal faces criticism that it's not friendly enough to borrowers. More about that program below.
The VA's first option is to offer a repayment plan, in which you pay extra each month for an agreed-upon period until you have repaid the past-due amount.
If you can't afford a repayment plan, the next step would be a loan modification, in which the mortgage's term would be extended and the interest rate may be adjusted.
Technically, the VA gives mortgage servicers the option of setting aside your past-due amount interest-free until you sell the home or refinance the mortgage, just as the FHA and USDA do. But the VA doesn't require servicers to provide deferrals.
The VA has proposed a solution in which the past-due amount would be deferred — sort of. Under the proposed COVID-19 Veterans Assistance Partial Claim Payment program, the past-due amount would be set aside as a second mortgage with a 1% interest rate, to be repaid within 10 years. You wouldn't have to begin repaying immediately — you could wait up to five years — but the unpaid interest would be added to the loan amount. As long as you're not paying, the amount you owe would grow each month.
The VA hasn't implemented COVID-VAPCP and hasn't suggested a start date. It proposed the program in December 2020 and requested public comment. Some of the resulting comments were critical, asking the VA to reconsider charging interest and requiring repayment before the home is sold or the mortgage is refinanced.
"If VA establishes a partial claim process, it should financially benefit the veteran or servicemember, not create a new loan that they have to pay back," three Democratic members of the Senate Banking Committee wrote in a letter to the VA.
The Mortgage Bankers Association and Housing Policy Council asked the VA to adopt a program similar to the FHA's and USDA's, in which the past-due amount would be deferred interest-free and repaid when the home is sold or mortgage is refinanced. A coalition of 27 banking associations and consumer advocacy groups sent a similar request.
What to do if your forbearance is ending soon
When you've endured money troubles caused by a pandemic, you crave certainty and simplicity, which mortgage companies and regulators aren't giving you. But in their clumsy, bureaucratic way, they are committed to helping you.
Here are three tips to help your mortgage servicer help you exit forbearance:
- Your servicer will try to contact you a month before your forbearance ends, whether it's the original forbearance or an extension. Respond promptly.
- Those forbearance extensions exist to help you out of a financial jam. Accept an extension if you need it.
- Familiarize yourself with your options so you'll know what to request. Talk to a housing counselor if you want to hear a sympathetic voice that will explain your options in detail.