The coronavirus crisis has left millions of Americans out of work, with their finances shattered.
Many homeowners have been only too eager to put their mortgage payments on hold, as allowed under the relief law from last March that also brought you that very first stimulus check, for $1,200.
If you've been experiencing financial hardship due to the pandemic and have found yourself struggling to pay your mortgage each month, the forbearance program has let you ignore those bills.
The initial payments pause was limited to six months, but homeowners could request a six-month extension. Now, the Biden administration is offering up to an additional six months of forbearance — so homeowners "will receive urgently needed relief as we face this unprecedented national emergency," the White House said in Tuesday's announcement.
Here are some important things to keep in mind about the program.
How forbearance works
Forbearance doesn’t wipe out your monthly payments, it just allows you to postpone them without getting hit by late fees. Because the credit bureau reporting of overdue payments is suspended, you won’t take a hit to your credit score for taking a break from your loan.
The relief has been limited to homeowners with federally backed mortgages, which are the majority of U.S. home loans. Those include:
Loans sold to government-sponsored mortgage giants Fannie Mae or Freddie Mac (which are regulated by the FHFA).
Mortgages guaranteed by U.S. agencies including the Federal Housing Administration (FHA loans), the Department of Veterans Affairs (VA loans) and the U.S. Department of Agriculture (USDA loans).
When forbearance eventually ends
An estimated 2.7 million homeowners holding 5.35% of the nation's mortgage loans are currently in forbearance, according to the latest data from the Mortgage Bankers Association.
If you're in that group, these are your options for making up your missed payments once the curtain finally comes down on the program:
Tacking them on at the end of your mortgage term.
Making additional payments — on top of your regular mortgage payments — for up to 12 months.
Agreeing to make a lump-sum repayment when the home is sold or refinanced, or when the mortgage term comes to an end. A Mortgage Bankers Association survey found this was the most popular option.
Alternatives to forbearance
Face it: Though the government has been very willing to stretch out the mortgage freeze, the forbearance program will eventually wind down and borrowers will have to pay the piper — or, in this case, the loan servicer.
If you'd rather not keep delaying your eventual day of reckoning with your mortgage, here are two ways to make your loan more manageable and resume making your payments now.
1. Refinance to lower your mortgage payment
You don’t need to keep deferring your payments to get some relief from your mortgage bills.
The economic turmoil resulting from the pandemic has resulted in the cheapest mortgage rates on record, meaning you're probably due for a refinance that could slash your housing costs.
An estimated 16.7 million homeowners have the potential to reduce their mortgage payments by an average $303 through refinancing, says the mortgage technology and data provider Black Knight.
Refi rates can vary widely from one lender to the next, so it's crucial that you shop around. Get at least five rate quotes to find the best rate available in your area and for a person with your credit score.
2. Ask for a loan modification
Most lenders and loan servicers have been willing to work with homeowners during the pandemic. You might ask about a loan modification, which would keep you in the same mortgage but with new terms that will be easier for you to meet during this time of financial challenges.
If you feel you're at risk of defaulting under your original mortgage framework, a loan modification allows you to change one of the parameters.
You might be able to negotiate a lower interest rate or monthly payment, or the lender might be willing to shrink the balance remaining on your loan.
Modification may come with administrative or filing fees. You'd have to weigh whether those would be more expensive than the closing costs associated with refinancing your mortgage.