In Los Angeles County, at least 55% of residents have lost their job through layoffs and furloughs thanks to the spread of COVID-19. People who had no reason to worry about job stability or reliable income suddenly had the rug pulled out from under them in a way that they never could have predicted.
Obviously, this is drastically affecting many people’s ability to pay their mortgage, and unfortunately, the government has so far offered minimal assistance to people struggling. That leaves it up to you, the homeowner, to be as proactive as possible in finding a way to minimize the financial toll this takes on you and your family.
That means finding a way to handle your looming mortgage payments in a way that doesn’t tank your credit score. Here are some options to consider when trying to make a payment strategy:
Mortgage Loan Forbearance
At the end of March, Congress passed the CARES Act—a stimulus package meant to assist people and businesses affected by COVID-19.
For homeowners, the act stipulates that people with a loan owned by Fannie Mae/Freddie Mac/Ginnie Mae (HUD-FHA) loan can have the option to request a forbearance on their mortgage. Forbearance is not loan forgiveness or deferment. It simply means that for a limited period of time your loan payments will be suspended. When the forbearance period ends, you have to pay back that money.
How Forbearance Works Under the CARES Act
The first thing to realize about this mandate is that it does not help every homeowner, and it doesn’t kick in automatically. As previously mentioned, this offer is only extended to people with federally-back loans. Last year, 63% percent of mortgage loans were owned by Frannie Mae, Freddie Mac, VHA, FHA, or USDA.
That other 37% of mortgages are not federally-backed and aren’t guaranteed this assistance.
If you have one of these federally-insured loans, you can request a forbearance from your lender. The period of forbearance is 180 days. When that 180 days is up, you have the option to extend another 180 days.
Does it Affect Your Credit?
It’s not supposed to.
In the CARES Act, a temporary amendment was added to the Fair Credit Reporting Act. In this section, it explains that as long as the borrower was current on payments at the time of entering into the forbearance (and as long as the arrangement was made after January 31st), then lenders can’t report the forbearance.
Conversely, if you were behind on payments at the time you entered into the forbearance (even if it was after January 31st), the lenders can leave you reported as “delinquent” to credit bureaus. However, if you get your payments up to date while you’re in the forbearance period, they have to report you to bureaus as current.
So, if you missed a payment before COVID-19, you can still get a forbearance if your income was affected by the economic shutdown. This won’t improve your credit score, but it will at least pause your payments so you don’t wrack up fees and penalties.
But What Happens to Your Credit After Forbearance?
During the state of emergency when the CARES Act is in effect, your credit isn’t supposed to be hurt by a forbearance. You’re also not supposed to incur any fees or penalties during this time.
However, the problem with this bill is that there’s little mention of what the lenders can and can’t do to you after. Hopefully, Congress will pass a clear set of guidelines to protect borrowers after the state of emergency has lifted. If they don’t, you will be fine now, but there’s no telling what kind of penalties you could be hit with in the future.
There are several different payback options available. Some possibilities for repayment include:
- Paying everything in one lump sum or balloon payment
- Higher monthly payments until the money accrued during the forbearance period is paid off
- Adding the suspended payments to the end of your loan, effectively extending your repayment time frame
- A loan modification that reduces monthly payments after the forbearance
Different lenders offer different payback options, but the Federal Housing Finance Agency (FHFA) has promised that no one will be required to hand over one lump sum when it’s time to resume payment.
But unfortunately, many borrowers have been reporting that their loan servicers have told them that will be expected to make a balloon payment. If you don’t make the payment and you don’t qualify for a loan modification you’ll go into foreclosure.
Forbearance Should Be a Last Resort
Forbearance should not be entered into lightly.
This is not for people who can pay but want to hold on to some cash as a sort of insurance policy in case their income or savings dries up. Forbearance should be for people whose only option is to buy some time in the hopes that they’ll be able to pay later on.
For one, if you have the money now, it’s safer to just pay it. COVID-19 has taught us that anything can happen–you have no idea what your situation might be in a year when it’s time to pay the money back. You could be creating an untenable financial situation for your future self.
If you have to be particularly frugal in order to pay your mortgage, do that. Unless you’re faced with a decision like “do I feed my family this month or do I pay my mortgage?” don’t request a forbearance.
Potential Legal Trouble Down the Road
Another reason against forbearance for those who don’t have immediate need is that it could cause legal trouble down the road.
According to the CARES Act, you don’t have to provide any supporting documentation of financial hardship in order to request a forbearance. Your loan servicer will just take your word for it.
However, lying on a federally insured mortgage transaction is a felony. The government is preoccupied with the virus now, but eventually, things will settle down. When they do, they will still have the right to conduct a post-closing audit.
If they find that you misrepresented your situation—you didn’t actually get furloughed; you actually had untouched cash reserves, etc.—you could be at risk for paying a big fine or even jail time.
The Future is Unknown
The last reason why you shouldn’t get a forbearance unless you have no other option—and this can’t be overstated—we have no idea what might happen when this is all over and you’re no longer protected by the CARES Act.
For example, at the end of the forbearance period, it’s very likely that you won’t be able to pay the lump sum. If you elect to get a loan modification so you can handle the payments, that could be what hurts your credit and keeps you from being able to get approved for other loans for years (think 7-10+ years) to come.
Another example relates to those who may want to go into forbearance within the first 6 months of your loan. To put it simply as possible, under normal circumstances, when someone misses the first 6 payments of a loan, it can become uninsurable and unsellable.
With lots of people pausing their loan payments in the first 6 months through the CARES Act, this will put many lending companies in jeopardy of going out of business. To mitigate this fallout, companies will likely develop new guidelines, policies, or penalties for borrowers who did this. Who knows what they’ll come up with and how it will affect your credit or ability to borrow in the future.
Until (and if!) the government clearly defines what can and can’t happen after the state of emergency is lifted, you can’t know the full weight of how this will affect you and your credit.
If Forbearance IS Your Only Option
If you’ve exhausted all other avenues and this is your last resort, get in contact with your loan servicer as soon as you make the decision. There will be long wait times and you don’t want to miss a payment because you couldn’t get in contact with them before your due date.
Keep the Receipts and Keep an Eye on Your Credit
Every communication you have with your loan servicer should be heavily documented. If you make an exploratory call to find out your options, document what you were told and the name of who told you. That way if you call again and suddenly another service representative contradicts what you were originally told, you can back it up.
When you do come to an agreement, document that too. Every step of the way you should be saving emails, taking notes, and saving screenshots.
30 days after your agreement goes into effect, check your credit score to make sure that everything is being reported according to your agreements. Mistakes on credit reports are more common than you might think, and that can hurt your score through no fault of your own.
Luckily, Experian, Equifax, and Transunion have agreed to give free weekly credit reports for the next year in light of the pandemic. You can check your report on AnnualCreditReport.com.
If you notice that they report you as delinquent when you’re actually in forbearance, you can use your documentation as proof of your agreement and get your credit score corrected.
Take a Look at These Resources
If you’re struggling to pay your mortgage right now, it’s likely that you’re struggling in other areas as well.
There are lifelines available through the government and Los Angeles community. Check out our IET Real Estate COVID-19 community resource guide to see if there’s a program that applies to your situation.
And if you’ve been affected by COVID-19 and have a mortgage or real estate question, reach out to us for a free consultation. Together we can discuss your options and help you understand what you’re up against.