What Happens When Mortgage Forbearance Programs End?

As a result of mortgage forbearance programs, millions of American homeowners were able to pause their mortgage payments to help them weather the worst of the health and financial storms caused by the COVID-19 pandemic.

As the economy rebounds, many forbearance programs will end, which means the resumption of monthly mortgage payments. Although the suspension of mortgage payments helped homeowners get back on their feet financially, mortgage forbearance isn’t the same as mortgage forgiveness, where your debt is simply erased, excused, or reduced. You will have to arrange with your lender or servicer to pay back the amount you weren’t able to pay while forbearance was in place.

Typically, you have several options for repayments. Not all borrowers, however, will be eligible for all options, so be sure to ask your servicer about what options are available to you. We’ll take a closer look at these possibilities in a moment.

The upside of forbearance relief

Let’s start with some very good news. According to the Consumer Financial Protection Bureau, most homeowners who received forbearance, under CARES Act guidelines, there will be no additional fees, penalties, or additional interest (beyond scheduled amounts) added to your account.¹

Here’s another bit of good news. Typically, in non-COVID-19 times, if you skip a mortgage payment or several or you’re late on your payments, your FICO score is going to suffer, making it more difficult or expensive to refinance. But if you were in a lender-approved forbearance program due to the pandemic, you shouldn’t see a black mark on your credit.

Your credit history and credit score are vital to your financial success, of course, if you’re seeking to refinance your mortgage with a better interest rate or longer term to reduce your monthly mortgage payments. By refinancing, the consumer’s total finance charges may be higher over the life of the loan.

Lastly, under the CARES Act, your servicer can’t demand repayment in one lump sum for everything you owe. But you will have to work out a repayment plan, which can take many forms. Now for that closer look:  

Your Options

Ask for a forbearance extension.

Forbearance protections have been extended several times during the pandemic, and even if yours is about to expire, it never hurts to ask for an extension. Perhaps your pre-pandemic job is still waiting for you, but the restart date has been pushed back a few weeks or months. Typically, loan servicers are supposed to reach out to borrowers 30 days before a borrower’s forbearance plan ends, but that doesn’t mean you should necessarily wait for their call. Call your lender or servicer to get the ball rolling.  

Remember, it never hurts to ask!

Ask for an intermittent payment plan

An intermittent repayment plan allows you to bring your mortgage current over a specific period of time. To catch up, you will need to make additional payments on top of your regular monthly mortgage payments. Your lender and type of loan you have (FHA, conventional, etc.) may determine your payback period. For example, Fannie Mae, a large purchaser of conventional mortgages, allows repayment up to 12 months.²

Ask for a loan modification.

Perhaps your old job isn’t coming back, or you’re already retired. At the start of the pandemic, maybe you sold off some of your investments out of panic, a decision that you now wish you could take back. Millions of other Americans also thought the economy was falling off a cliff, so you weren’t alone. After hearing your story and running the numbers, your servicer may work with you to limit your risk of default by lowering your interest rate or reducing your monthly payment.

Ask for a payment deferral.

This is really just having your servicer add your period of non-mortgage payments to the back end of your loan. So, if you suspended payments for a year on a loan that still had 12 years to run, your new term would be for 13 years. 

Ask to refinance. Oddly, you can’t refinance your mortgage while your loan is in forbearance. But that shouldn’t prevent you from talking in advance to different lenders about what their refinancing policy is coming off a forbearance. Last May, the Federal Housing Finance Agency issued guidance stating borrowers who were current on their mortgages could qualify immediately for a refinance. Other lenders may not let you refinance until a year after forbearance, so prepare to shop around.ᶾ

The reverse mortgage loan option.

All the pre-mentioned solutions share one thing in common. Whether you get another extension, or you’re allowed to make smaller payments or payments over a longer period, you will still be making monthly mortgage payments at some point.*

What if you didn’t have to make any monthly mortgage payments for as long as you continued to live in your home? It’s possible with a reverse mortgage loan as long as you continue to maintain your home and keep up your property taxes and homeowners insurance. By honoring these and all other applicable loan terms of a reverse mortgage, you would not have to repay the loan until you permanently leave your home.

With a reverse mortgage, you can pause or suspend your monthly mortgage payments for as long as you live in your home and comply with your loan terms.

General Requirements for RM

To be eligible for a reverse mortgage, you must meet certain requirements such as being 62 years or older, live in, and have sufficient equity in your home.

Interestingly, unlike so many other kinds of loans, a reverse mortgage doesn’t require that you have a job or boast a specific credit score. But you will need to show, among other things, the willingness and ability to pay your property taxes and homeowners insurance and maintain your home.

To help make this determination, a review of your credit history, employment, debts, and income will be conducted as part of a financial assessment, a requirement implemented in 2015 to further protect borrowers and lenders.

The FHA also introduced the Life Expectancy Set-Aside or LESA the same year to assist reverse mortgage borrowers who may be at risk of not meeting their property tax and homeowners insurance obligations.  A LESA functions very much like an escrow or impound account on a traditional mortgage, where an account is set up on behalf of the borrower for the specific and automatic payment of property taxes and homeowners insurance funded each month as part of the regular mortgage payment.⁴  

The upside with this arrangement is you will always have your property tax and homeowners insurance payments covered as long as there are funds in your LESA. The downside is, your initial payout from a reverse mortgage will be less because a portion of your proceeds goes to funding the LESA.

Finally, before your application for a reverse mortgage loan can be submitted, you must participate in an independent, HUD-approved counseling session, either in person or over the phone, to ensure that you understand what a reverse mortgage is and how it works, including your commitments and obligations under the loan. This is one more safeguard built into the reverse mortgage process, protecting you and your lender.

If you are in a forbearance program that has recently ended or is about to expire, use this as your cue for a new mortgage beginning. Explore all your options, including a reverse mortgage, if you are 62 or older.

We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.

*By refinancing, the consumer’s total finance charges may be higher over the life of the loan.

¹ https://www.consumerfinance.gov/coronavirus/mortgage-and-housing-assistance/help-for-homeowners/learn-about-forbearance/

²  https://www.fanniemae.com/here-help-homeowners/you-dont-have-repay-forbearance-amount-all-once-upon-completion-your-forbearance-plan-get-facts

ᶾ https://www.foxbusiness.com/money/how-to-refinance-mortgage-after-forbearance-ends

⁴ https://www.aag.com/articles/finance/what-is-lesa/