The CARES Act mortgage forbearance repayment options can be confusing to many but we’ve laid out the 4 options you have under the CARES Act.
For millions of American’s financially impacted by COVID entering into a forbearance plan with their mortgage company may be the only option to saving the home from foreclosure.
Forbearance only applies to federally backed loans with Fannie Mae, Freddie Mac, VA, HUD (FHA), and USDA. Private mortgage lenders are not required to participate in the CARES act but some may offer forbearance.
Under the CARES Act, financially struggling homeowners are able to pause their mortgage payments for 180 days plus an additional 180-day extension if their financial condition has not improved.
An additional benefit to homeowners is that there is no negative impact on their credit score and the mortgage company cannot commence any foreclosure action while in forbearance.
However, forbearance does not mean forgiveness. Federally backed loans do not provide for payment forgiveness under the CARES act. The paused mortgage payments are due once the forbearance ends.
At the end of mortgage forbearance, the homeowner is required to make payment arrangements with their mortgage company. Another provision of the CARES act is that a mortgage company cannot require a homeowner to pay past due payments in a lump sum if they do not have the ability to do so.
Here are the repayment options available for homeowners:
Repayment plan
A mortgage company can structure a plan for a homeowner which allows them to pay back their past due payments over time by paying their regular monthly mortgage plus an additional amount every month until the paused payments are paid in full.
Let us use the example of a homeowner who has a monthly mortgage payment of $1200 and was approved for six months of forbearance. At the end of forbearance, the homeowner owes $7200.
In month seven, the homeowner is due to resume making their regular monthly payment of $1200 and is due to repay the paused amount of $7200. The homeowner, in this example, does not have the ability to repay the entire amount in a lump sum but can agree to repay $7200 over an eighteen-month period. The table below demonstrates the timeline for repayment.
Timeline for Repayment
In Forbearance
| Month 1 | Month 2 | Month 3 | Month 4 | Month 5 | Month 6 | Total due at end of forbearance | $1200 | $1200 | $1200 | $1200 | $1200 | $1200 | $7200 |
|---|
Repayment commences
| Month 7 | Month 8 | Month 9 | Month 10 | Month 11 | Month 12 | Month 13 |
$1600 $400 |
$1600 $800 |
$1600 $1200 |
$1600 $1600 |
$1600 $2000 |
$1600 $2400 |
$1600 $2800 |
|---|
| Month 14 | Month 15 | Month 16 | Month 17 | Month 18 | Month 19 | Month 20 |
$1600 $3200 |
$1600 $3600 |
$1600 $4000 |
$1600 $4400 |
$1600 $4800 |
$1600 $5200 |
$1600 $5600 |
|---|
| Month 21 | Month 22 | Month 23 | Month 24 | Month 25 |
$1600 $6000 |
$1600 $6400 |
$1600 $6800 |
$1600 $7200 |
$1200 Regular payments resume |
|---|
The challenge for homeowners will be whether they have the ability to repay the extra monthly amount if their financial condition has not yet improved at the end of forbearance.
Payment Deferral
For those homeowners who do not have the ability to enter into a repayment plan, another option would be for a payment deferral. Under this option, the homeowner can make up the payment at the end of the loan term or when the property is sold or refinanced. This option is offered if the homeowner can continue making their regular monthly mortgage payments but cannot afford extra payments each month.
Using the previous example of forbearance totaling $7200, let us say the homeowner has a 30-year mortgage and the homeowner forbearance ends in the 54th month of the loan term. In the 55th month, the regular monthly payment will be due plus the $7200. The chart below demonstrates the payment cycle and when the $7200 will be due.
Loan modification
Homeowners whose financial condition has not improved significantly but can afford a reduced monthly payment can work with the mortgage company to change the terms of the loan. The mortgage company adds the past due forbearance amount to the loan balance and can either adjust the interest rate or extend the loan term to make the payments affordable.
Homeowners need to be aware that reducing a mortgage payment may not always be an option based on the interest rate and terms of the original mortgage. In order to provide a reduced payment some mortgage companies may decide to put a second loan on the property for the forbearance amount due which is known as a partial claim. This second loan will need to be paid in full at time of sale, end of loan term, or when refinanced.
Lump sum
Homeowners who have the ability to repay the forbearance amount in full simply arrange with their mortgage company for payment and continue making their monthly mortgage payments per the original loan terms.
Final thoughts….
It is important for homeowners to understand all CARES Act Mortgage forbearance repayment options and to explore all repayment options with their mortgage company before signing anything. There is no industry standard established for how mortgage companies handle forbearance repayment under the CARES act.
The reason there are repayment options available is each homeowner loan is unique with different terms, rates, and mortgage balances that affect what options the mortgage company can offer for repayment.
Some homeowners may still be struggling financially due to COVID and may need to seek another alternative if they do not have the ability to pay their mortgage any longer.