Your lender might let you miss a few mortgage payments. Three questions you should ask first
- The coronavirus relief law – or CARES Act – allows affected borrowers with federally backed mortgages to request a payment reprieve of up to 12 months.
- States have partnered with lenders to offer similar programs on mortgages, waiving up to 90 days of payments.
- Payments waived or delayed could come back to haunt you, and there could be other surprise repercussions.
Homeowners whose finances have been battered by coronavirus might want to think again before postponing their mortgage payments.
Congress has offered some relief to mortgage borrowers who are experiencing financial strain from the coronavirus pandemic, which has left a flood of layoffs in its wake.
The Coronavirus Aid, Relief, and Economic Security Act – or CARES Act – has a provision that would allow affected homeowners to apply for up to a 12-month reprieve on some mortgages.
This covers people who have federally backed mortgages, including loans owned by Fannie Mae or Freddie Mac.
States have also rolled out their own relief measures for borrowers whose mortgages aren't backed by the federal government. New York, New Jersey and California are among the jurisdictions that are allowing homeowners to request a 90-day reprieve on their payments.
Borrowers aren't being forgiven. Instead, the state and federal COVID-19 measures call for forbearance – the postponement or reduction of the loan payment due.
"Lenders offer forbearance, which doesn't alleviate the expectation of payment, but puts it off," said Barry Zigas, senior fellow at the Consumer Federation of America.
There are enough potential snares for homeowners that Richard Cordray, former director of the Consumer Financial Protection Bureau, co-authored a letter to the organization's current director Kathy Kraninger, calling on the bureau to protect borrowers.
"Already, there are worrying signs that people are getting the runaround as they seek forbearance or other relief," Cordray wrote in his April 6 letter.
"New rules were put in place several years ago to address these problems, and the mortgage servicers cannot now be excused from complying with these rules when consumers need them the most," he wrote.
Document every interaction you have with your mortgage servicer and start with these three questions before you sign up for forbearance.
1. What's your eligibility?
Reach out to your loan servicer first – that is, the company that bills you each month – to start the application process and demonstrate that you're experiencing financial difficulties related to the pandemic.
This can be complicated, as it may not be the business that originally made the loan to you.
"Lenders often contract servicing to a different company, and it may not be someone you've dealt with before," said Cordray.
Whether you're eligible for relief under the federal CARES Act or your state's plan will depend on who owns your loan.
Check here to see if your loan is owned by Fannie Mae or Freddie Mac, to see if you would be eligible for at least the 180-day relief offered by the CARES Act.
2. What happens to your payments after the reprieve?
Will the missed mortgage payments be folded into future payments? Will they be tacked on to the end of your mortgage, which could add a few months to the term of your loan? Could they be due in a lump sum later?
A homeowner who's having a hard time paying the loan could wind up working with the servicer to restructure the mortgage altogether.
"A modification changes the underlying terms of the loan, extending it from 30 years to 40 years," said Daniel Eaton, attorney at Christensen Law Office in Minneapolis.
3. What does this mean for property taxes and insurance?
Homeowners who use an escrow account set aside a portion of each mortgage payment to go toward homeowners' insurance premiums and property taxes.
Borrowers must ask what will happen to those expenses if they suspend their mortgages, as the CARES Act doesn't provide clarity.
Your lender may foot the bill for insurance premiums and property taxes because it's protecting its interest in your home, said Eaton.
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If a lender winds up insuring your home due to your inability to pay the mortgage, it will probably use what's known as force-placed insurance, which is costly and won't cover your possessions, said Eaton.
When the bank covers escrow costs, those expenses could be factored into your eventual repayment of the suspended mortgage payments.
"If your lender pays it, find out what's going to happen during the time you're not making payments and what happens if they pay," said Zigas. "How does it all get figured out at the end?"