How Is Mortgage Forbearance Paid Back? Lump Sum Now or Never?

At this point, most homeowners have probably heard of the CARES Act and its massive 12-month forbearance option for those with federally-backed mortgages.

It sounds pretty sweet – you can request six mortgage-free months, followed by an additional six months if you need it, with little paperwork or evidence of hardship from COVID-19.

Apparently, all you need is a mortgage forbearance letter and you should be good to go, assuming loan servicers don’t revolt and balk at the sheer number of requests that flood through the door.

Does Mortgage Forbearance Need to Be Repaid?

• Yes, homeowners are expected to repay the missed mortgage payments
• Loan servicers are NOT waiving payments, they are offering to delay them
• The big question is how and when are homeowners supposed to catch up
• Especially if the homeowner loses their job permanently or severely depletes their assets along the way

The million-dollar question is how will the skipped mortgage payments be paid back.

Remember, these aren’t waived mortgage payments, they are delayed mortgage payments.

You are getting a brief moratorium on payments while furloughed or out of work, after which time you must make good on those missed payments, assuming you do get back to work.

Everything is working on the assumption that this is a temporary situation, unlike the mortgage crisis a decade ago that was driven by fundamental issues, like sketchy mortgage financing and overpriced homes.

Most homeowners could afford to make their mortgage payments in the normal, pre-COVID-19 world, so once this is all over, they should go back to making their payments per usual.

There are a few issues with that theory. For one, we might not go “back to normal” right away or ever.

While the smart people in the room have a plan, or are at least working on one, to get us back on track as a society, much of what I’ve heard so far speaks of a gradual return.

For some industries, like big events, concerts, restaurants, bars, and anything that involves large crowds, it might be a much longer road back.

How does a homeowner who missed six to 12 mortgage payments simply return to making their payments if they don’t have a job, or even if they’ve lost tons of income and therefore depleted their assets along the way?

Surely you can’t expect these individuals to pay a lump sum right after the forbearance ends to make up for the shortfall. That would be ridiculous.

I would venture to say that most Americans don’t have the ability to make multiple mortgage payments at once, even during good times. So asking them to pay several during dire times seems absurd.

Fannie Mae and Freddie Mac’s Post-Forbearance Approach

• Option #1: Reinstatement (pay in full at end of forbearance period)
• Option #2: Repayment Plan (pay back within 12 months of end of forbearance)
• Option #3: COVID-19 Payment Deferral (pay back eventually when you refi, sell, or pay off entire mortgage)
• Option #4: Loan Modification (for those who can’t even afford to resume regular monthly payments)

Fortunately, Fannie Mae got to work and rolled out post-forbearance guidelines to put its loan servicers and homeowners at ease.

FYI, these mostly mirror the post-forbearance guidelines of Freddie Mac.

There is basically a waterfall approach where servicers will reach out to borrowers 30 days before their forbearance plan is scheduled to end.

At that time, they’ll work to determine which available assistance program will be best for them at that time depending on hardship status.

The preferred solution starts with reinstatement, where the borrower simply pays the full forbearance amount when the forbearance period ends.

While obviously an ideal end to forbearance, it’s highly unlikely many homeowners will be able to muster this.

That brings us to option two, which is a repayment plan where a portion of the forbearance amount is paid each month (for up to 12 months) along with the homeowner’s regular mortgage payment.

Again, this may fall short seeing that it requires a higher total monthly payment and it only lasts for a year.

Given the fact that homeowners may have missed six to 12 payments, it seems like a big ask to make up all those payments in the same amount of time.

That takes up to option three, COVID-19 Payment Deferral, which will likely be the most common outcome.

It allows borrowers who are unable to reinstate or afford a repayment plan to simply add the forbearance amount to the end of the loan.

And that amount won’t be due until the final mortgage payment is made, or earlier if the property is sold or the mortgage is refinanced.

In other words, homeowners get to kick the can down the road and worry about it later, which is a great deal.

Lastly, there is option four, the loan modification, which as the name implies, is pretty self-explanatory.

In the event the borrower can’t even afford to resume regular monthly mortgage payments (forget about the missed ones), they’ll need their home loan modified to make it affordable.

This may involve an interest rate reduction and/or a loan term extension, but probably not a principal reduction.

Additionally, Fannie Mae released guidance on mortgage forbearance waiting periods for those wondering when they get another home loan.

A Post-Forbearance Solution That Makes Sense for FHA Loans

• Fannie Mae and Freddie Mac originally offered vague solutions involving loan modifications before rolling out the comprehensive guidelines above
• This upset homeowners who thought they’d have to pay it all back in one lump sum things while their credit score took a hit
• HUD has always had a good solution in its COVID-19 National Emergency Partial Claim
• Missed payments would be set aside as an interest-free second mortgage that doesn’t need to be repaid until sale/refinance

The Department of Housing and Urban Development (HUD), which oversees the FHA loan program, put together a good Q&A regarding mortgage forbearance.

One question explicitly asks: Will the monthly mortgage payments that are reduced or suspended under a COVID-19 Forbearance need to be repaid?

They don’t mince words; “Yes. A homeowner with an FHA-insured mortgage who receives a COVID-19 National Emergency Forbearance is responsible for repaying the suspended mortgage payments or the balance of reduced mortgage payments.”

With regard to how, they say your loan servicer can help determine “options for eventually repaying any suspended mortgage payments or the balance due as a result of reduced mortgage payments.”

They note that you won’t be charged late fees and penalties while on a “COVID-19 National Emergency Forbearance plan.”

But what about after? Again, a great unknown.

However, HUD does have what appears to be a good solution to deal with the missed mortgage payments.

COVID-19 National Emergency Partial Claim

They have implemented the “COVID-19 National Emergency Partial Claim,” which can be put to work once the COVID-19 forbearance period ends.

In short, it reinstates borrowers’ home loans by authorizing loan servicers to advance funds on behalf of homeowners.

Those advances are placed in an interest-free subordinate (second) mortgage that the borrower doesn’t have to pay down until their first mortgage is paid off, either via home sale or mortgage refinance.

For me, this makes prefect sense assuming loan servicers are able to set aside all those missed payments for an unknown length of time.

It would actually allow homeowners who get back to work to return to making regular monthly mortgage payments, as opposed to making six or 12 of them at once, along with the next one due.

Nobody is going to make seven or 13 mortgage payments all at once, or anything close to that. Asking someone to make two at once is a longshot.

Meanwhile, Freddie Mac has said that it could offer “loan modification options to provide mortgage payment relief or keep those payments the same after the forbearance period.”

And Fannie Mae said, “a servicer must work with the borrower on a permanent plan to help maintain or reduce monthly payment amounts as necessary, including a loan modification.”

For the record, Fannie Mae’s Flex Modification adds past due amounts to the unpaid loan balance, then recalculates your monthly payments over the new, potentially revised loan term.

So that could work if monthly payments were only incrementally higher as as a result.

Fannie Mae and Freddie Mac also have a new payment deferral option that works similar to the partial claim solution that will be rolled out soon, but it only allows for 1-2 missed payments, not 6-12.

The VA has instructed loan servicers not to require a lump sum payment upon exiting forbearance.

Rather, they ask that they consider other options such as a repayment plan, where installments are made over time, or a loan modification, where a new payment schedule is established that includes the delinquent amount.

If the loan servicer wants to go the lump sum route, they ask that it be paid back at the end of the loan.

They have since added that borrowers may defer any missed payments, effectively making them due at the end of the loan term along with the final payment.

If that’s the case, the VA requires that amount to be non-interest bearing, which is great news for the homeowner.

You can pay toward that deferred amount over the life of the loan via a repayment plan or request a loan modification if you won’t be able to resume regular payments.

Ultimately, don’t homeowners need assurances regarding what happens after, before agreeing to mortgage forbearance?

And what about credit scores post-forbearance? Will loan servicers begin calling these homeowners delinquent at some point?

The forbearance isn’t supposed to count against them, but will the loan modification?

Will they have trouble refinancing post-forbearance, or difficulty financing a subsequent home purchase if they took part in the mortgage forbearance relief?

FYI, the last day to apply for mortgage forbearance is also a moving target.

There are too many unknowns right now, which makes it difficult for a homeowner to determine if taking the forbearance option is a good idea.

That being said, I don’t think it will stop millions of homeowners from taking part.

Read more: Number of Mortgages in Forbearance Jumps Nearly 1000%