It’s not just a matter of taking the government up on its offer to postpone your mortgage payment. Doing so may find you in a murkier place than simply feeling the financial strain from the coronavirus pandemic, according to CNBC’s Darla Mercado.
Mercado reports that while the Coronavirus Aid, Relief, and Economic Security Act (CARES) has a provision that would allow affected homeowners to apply for up to a year on federally-backed mortgages, states have also rolled out their own relief measures for borrowers whose mortgages aren’t backed by the federal government, New York and California among them, offering 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,” says Mercado, who also quotes an executive from the Consumer Federation of American who adds, “Lenders offer forbearance, which doesn’t alleviate the expectation of payment, but puts it off.”
It sounds reasonable at first, but 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 the borrower.
“Already, there are worrying signs that people are getting the runaround as they seek forbearance or other relief. 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.
Questions to Ask When Considering Forbearance
Mercado urges those wishing to proceed with forbearance to document every interaction they have with their mortgage servicer and start by asking some basic questions, first among them, their 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 This can be complicated, as it may not be the business that originally made the loan to you,” she says, since contract servicing is often done by a different company — one you have never dealt with before. So your eligibility is determined by who owns your loan.
Another question you should seek an answer to is whether the missed mortgage payments would be folded into future payments, or if they could be required 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,” says Mercado, who adds that modification could change the underlying terms of the loan, extending it from 30 years to 40 years.
Another question to ask is how are property taxes and insurance affected by forbearance? If they are normally impounded into your monthly payment, you must ask what will happen to those expenses if they suspend your mortgage, as the CARES Act doesn’t provide clarity.
The lender may foot the bill for insurance premiums and property taxes because it’s protecting its interest in your home, but if a lender winds up insuring your home due to your inability to pay the mortgage, it will probably use something known as a “forced-placed insurance.” It’s costly and won’t cover your possessions, so get clarity on what would happen.
“When the bank covers escrow costs, those expenses could be factored into your eventual repayment of the suspended mortgage payments,” says Mercado. But if your lender pays it, it’s wise to determine what will happen during the time you’re not making payments.
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