The Federal Housing Finance Agency (FHFA) has announced that it’s extending mortgage forbearance for those struggling as a result of the coronavirus pandemic, with those who qualify now given a break of up to 15 months on their mortgage payments. Here, we take a look at what the new rules mean, and discuss whether mortgage forbearance is a good idea.
What is mortgage forbearance and when does it end?
Mortgage forbearance offers borrowers who can’t pay their mortgage the chance to pause their repayments for a set period of time, without the mortgage being reported as delinquent. Borrowers with Freddie Mac or Fannie Mae-backed mortgages have been able to request COVID-related forbearance of up to a year since March 2020, but the latest announcement extends this period by three months, and means struggling homeowners will have more of a break from making repayments.
The announcement means that anyone who’s in COVID-related forbearance as of February 28, 2021 will qualify for up to 15 months of paused payments, dated from the time their forbearance started. This extension could be particularly beneficial for those who entered forbearance early on in the pandemic, as without it they could be nearing the end of their forbearance period; now, they can get some additional breathing space.
Is mortgage forbearance a good idea?
For those whose finances have been impacted as a result of the pandemic – perhaps due to job loss, reduced income or additional expenses – forbearance can offer a lifeline. Being able to press pause on your mortgage payments can give you the space you need to get back on a firmer financial footing, without needing to worry about the impact on your credit score, or worse, the possibility of losing your home.
There’s also no need to avoid making repayments if you can afford them; if during your pre-agreed forbearance period you find your circumstances change and you can start making payments again, you’re free to do so - this, in turn, could reduce the impact on your finances once forbearance comes to an end.
So for many, forbearance can be a good idea, but it’s important to remember that it isn’t loan forgiveness – the money will still need to be paid eventually and interest will still accrue during the period, so in some cases it can simply push the problem further down the road. For this reason forbearance should only be seen as a last resort, and for those approaching the end of their forbearance period, it’s vital to start thinking about what happens next.
What happens after mortgage forbearance?
Once your forbearance period comes to an end, and ideally beforehand, you’ll want to contact your lender to discuss your options. If you’re still unable to make full repayments, you may qualify for an extension to your forbearance period; if not, a repayment plan will need to be arranged so you can repay the full amount.
Usually, this will either be achieved by making a higher repayment each month until you’ve caught up, or making more monthly repayments, thereby extending your overall repayment term. A lump sum payment could be another option, whereby you’ll pay the entire amount owed in one go, though for many this won’t be feasible, and lenders can’t force you to catch up on your repayments in this way.
Some may be facing the possibility of being unable to stay in their homes, in which case they always need to discuss things with their lender to prevent foreclosure.
Will mortgage forbearance affect my credit score?
Provided you were up-to-date on your mortgage payments prior to entering forbearance, the mortgage won’t be reported as delinquent, and under the Coronavirus Aid, Relief and Economic Security (CARES) Act, it won’t negatively impact your credit score.
Does mortgage forbearance affect refinancing?
Borrowers won’t be able to arrange a refinance mortgage while still in their forbearance period, but once it has come to an end, there’s nothing to stop them from doing so – provided timely mortgage payments were made in the months following the forbearance. Prior to the pandemic, borrowers would have been expected to show 12 consecutive months of full repayments before they’d be eligible to refinance – or indeed before they could apply for a loan to purchase a new home – but in May 2020 the FHFA reduced that timeframe to three months. Credit scoring criteria will still apply, of course.
What are the alternatives to forbearance?
If you’re struggling to make your mortgage repayments but don’t want to go down the forbearance route, there are other options to consider, depending on your circumstances. Refinancing could be one option if you think you could secure lower mortgage payments elsewhere, though if you’re in financial difficulty, it could be difficult to be approved for a new loan; if this is the case, it may be worth consulting credit repair services beforehand.
Looking at your other credit commitments could therefore be a solution, particularly if you have several credit cards or loans that you could consolidate into a single debt consolidation loan. And if not being able to pay your mortgage is part of wider, more significant debt concerns, talk to family, friends, or a debt counsellor, to see if they can help or have advice, but don’t let the issue go unattended. As a very last resort, debt settlement could be an option, although the long-term impact on your credit score and finances requires careful thought to ensure it is the right decision for your financial future.