Payment Deferral Will Be an Option to Repay Mortgage Forbearance

Last updated on June 23rd, 2020

The Federal Housing Finance Agency (FHFA) announced today that Fannie Mae and Freddie Mac have launched a new payment deferral option in light of the unprecedented disruption caused by the coronavirus.

The new workout option, known as “COVID-19 payment deferral,” was specifically designed by Fannie Mae and Freddie Mac to help those affected by a temporary hardship related to COVID-19.

The goal is to help borrowers in a simple and straightforward manner achieve current loan status after up to 12 months of missed mortgage payments.

How COVID-19 Payment Deferral Works

  • The delinquent amount is moved into a non-interest bearing balance
  • No payments are made toward this balance and mortgage remains otherwise changed
  • It is due at maturity or earlier if mortgage is refinanced or home sold
  • No trial period is necessary and runs through automated process to expedite

The way payment deferral works is pretty simple, which is the entire point of offering it.

Say a borrower missed 12 mortgage payments that were $2,000 each. That $24,000 would be set aside in a non-interest bearing account.

It would not need to be paid down or touched at all until the homeowner either refinanced their mortgage, sold their home, or otherwise reached maturity based on the original loan term.

The borrower’s original mortgage would remain unchanged otherwise, meaning they’d resume making the $2,000 monthly payment they were accustomed to making before COVID-19 disrupted their income.

This would make getting back on track very straightforward, and hopefully doable for most homeowners, assuming they are re-employed or find new work.

Eligibility for a COVID-19 Payment Deferral

  • Borrower must be on a COVID-19 related forbearance plan and unable to reinstate loan in full
  • Borrower must have a hardship resulting from COVID-19 such as illness, unemployment, or reduced income
  • Loan servicer must determine delinquency was temporary and borrower has ability to repay mortgage
  • Must confirm borrower has resolved hardship and is committed to resolve the delinquency
  • Loan must have been current or less than 31 days delinquent as of March 1, 2020

In order to be eligible for the COVID-19 Payment Deferral option, you must be in a COVID-19 related forbearance plan and able to resume regular mortgage payments.

This includes forbearance plans such as the one offered under the CARES Act, along with proprietary plans offered by individual banks, assuming Fannie or Freddie own your mortgage.

At the same time, you must be unable to fully reinstate your mortgage at the end of the forbearance period or unable to afford a repayment plan.

Additionally, the hardship has to be a result of COVID-19, not for some unrelated reason. To that end, the mortgage should have been current or no more than 31 days late as of March 1st, 2020, before this all began.

It should also be 31 or more days (one month) delinquent but less than or equal to 360 days (12 months) delinquent as of the date of payment deferral evaluation.

The loan servicer will achieve a so-called “Quality Right Party Contact,” or QRPC, in which they determine the reason for delinquency and whether it’s temporary or permanent.

This includes determining if the borrower has the ability to repay the mortgage debt, educating the borrower on workout options, and obtaining a commitment from the borrower to resolve the delinquency.

Lastly, the servicer must confirm that the borrower has resolved the hardship, though they are not required to obtain documentation of the borrower’s hardship.

The servicer must complete the COVID-19 payment deferral in the same month in which borrower eligibility is determined, though they will be granted a processing month.

So if your mortgage is 12 months delinquent as of the date of evaluation, you must make your full monthly mortgage payment during the processing month in order to receive the payment deferral.

Note that while loan servicers may report the status of payment deferral to the credit bureaus, they cannot charge the borrower administrative fees, late fees, penalties, or similar charges.

This means it shouldn’t count against you, though I did discuss the idea of forbearance preventing you from getting another mortgage.

Those who are unable to resume mortgage payments will be evaluated for other options, such as a Flex Modification that lowers payments via interest rate and/or loan term adjustments.

Overall, this confirms what we knew was coming and is excellent news for homeowners in forbearance plans.

It means they can continue making regular mortgage payments if affordable, as opposed to being forced to pay a lump sum or go on a repayment plan.

And the missed payments won’t be due until they refinance, sell their home, or the loan term ends.

The bad news is this might cause even more homeowners to opt for mortgage forbearance.

If you have an FHA loan and requested forbearance, they have a similar offering known as a “COVID-19 Standalone Partial Claim,” which is also a no-interest, junior lien that requires no payments and isn’t due until payoff, sale of your property, or when refinancing.

Those with VA loans are allowed to defer any missed payments and pay them at the end of the loan term along with the final payment.

Additionally, the VA requires any forborne payments to be non-interest bearing, meaning you won’t be penalized for doing so.

You may also be given the option to pay toward that deferred amount over time via a repayment plan or request a loan modification if unable to resume regular payments.

Read more: There Will Be a 3-Month Waiting Period to Get a Mortgage After Forbearance


Will Forbearance Prevent You from Getting a Mortgage in the Future?

Last updated on May 19th, 2020

Since the CARES Act rolled out in early April, more than four million Americans have reportedly put their mortgage payments on hold for up to 12 months.

The massive numbers taking part can be attributed to the widespread fallout from the coronavirus epidemic (COVID-19), and also the ease at which a homeowner can request assistance, with not much more than a letter or simple request to their loan servicer without proof.

It’s expected that many more borrowers will request mortgage forbearance in the month of May and beyond, as evidenced by a recent survey from Bankrate.

Update: There Will Be a 3-Month Waiting Period to Get a Mortgage After Forbearance

Need Help, But Not Yet Asking for It

need help

Apparently, many Americans are concerned about making mortgage payments in light of possible job losses or income curtailments, but most haven’t reached out for help yet.

Some 70% of Millennials said they were concerned about their ability to make mortgage payments over the next three months, but only 60% said they have contacted their lender.

Meanwhile, 56% of Gen Xers are concerned, but a mere 29% have reached out to their lender or loan servicer.

It’s even worse for Baby Boomers, with 43% concerned, and only 17% asking for help.

As to why, some said they didn’t know it was an option, or simply haven’t gotten around to it, or are waiting for lenders to reach out to them (good luck!)

Others cited unspecified reasons or said they came up with their own solution.

For me, this proves that homeowners are reticent to ask for help, possibly because they think it’ll count against them somehow, even though mortgage forbearance isn’t supposed to harm credit scores or result in delinquencies.

Mortgage Lenders Will Know You Requested Forbearance

  • Lenders told not to report loans in forbearance as delinquent to credit bureaus
  • But loan servicers and lenders are still flagging accounts on credit reports
  • Will these borrowers be considered “late” once the forbearance ends?
  • Could presence of forbearance on credit reports prevent borrowers from getting another mortgage?

My initial thoughts are it shouldn’t count against you, but that’s not always how it works, especially if a private company plays by its own rules.

After housing blew up a decade ago, the Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP) were rolled out to help struggling homeowners.

While these initiatives provided relatively immediate relief to homeowners, they also resulted in various waiting periods to get subsequent mortgages.

So a homeowner who opted to receive assistance may have had to wait a year or two to get another mortgage.

These waiting periods were even longer (up to four years) if the borrower received a principal reduction that resulted in them owing less than originally agreed.

But shorter if there were extenuating circumstances, of which there will be for just about everyone this time around.

The question is will they use the past as a model for the future? Things were a bit different back then because there was perhaps some borrower fault, and basically none today.

While you could argue that all homeowners should have reserves saved up for moments like these, they often aren’t required by Fannie Mae, Freddie Mac, the VA, or the FHA.

So you can’t really blame a homeowner impacted by an unforeseen virus to continue making mortgage payments. Nor can you blame them for accepting the assistance you’re offering.

In other words, I can’t see Fannie, Freddie, the FHA, or the VA disallowing a mortgage refinance or a new purchase loan if they extended the forbearance in the first place.

In the case of a refinance, mortgage lenders (or the investors) would presumably receive the missed payment amounts via the payoff to make them whole.

Will Mortgage Forbearance Count Against You?

  • Just because your mortgage isn’t late doesn’t mean it won’t hurt you
  • Lenders may impose waiting periods for borrowers post-forbearance
  • They will likely scrutinize loan files if you requested forbearance in the past
  • It will be key to show them the event is behind you if you want another mortgage

Sure, you’re not technically behind on the mortgage, per the CARES Act and other forbearance programs, but lenders will know that you entered into a mortgage forbearance plan. It’ll be noted on your credit report.

While it might not be a formal delinquency or late mortgage payment, it’ll be visible to creditors when you apply for a new credit card, auto loan, or a mortgage.

It’s a notable event from a credit perspective, and thus will be shared, though it shouldn’t officially count against you.

In other words, its presence doesn’t necessarily mean you won’t be able to refinance or get another mortgage on a different property, especially if it wasn’t your fault.

However, you’re going to have to qualify for the mortgage, like you usually would in normal times.

That might be the dividing line, not so much a waiting period or a flat-out denial just because you took advantage of widespread mortgage forbearance.

Note that guidelines will vary by bank, especially if it’s a jumbo loan or portfolio loan that isn’t backed by Fannie Mae or Freddie Mac, or a government agency like the FHA or VA.

Regardless, it’ll be very important to stay current on mortgage payments post-forbearance. The same goes for any other accounts that show up on your credit report.

An underwriter will dig into your financials to determine this to ensure it’s an isolated incident and really behind you.

Ultimately, it might hinge on the borrower showing that they are back on their feet and that it was a blip related to COVID-19 and not due to their own personal financial missteps or issues.

Like those loan mods in the past, it’ll be crucial that the borrower make on-time payments once forbearance ends to ensure they qualify for a new mortgage without further delays.

Those who still need assistance post-forbearance, via a loan modification or further forbearance, will likely have trouble qualifying for another mortgage.

But that’s pretty obvious – if you can’t pay your existing home loan, why would a lender give you another one?

Read more: Will home prices go up or down due to COVID-19?


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