To date, over 3 million homeowners have paused their GSE or Federally insured mortgage payments through forbearance under the COVID-19 stimulus bill, the CARES Act.
GSE or Federally insured mortgages fall into two categories:
Borrowers can put off their payments for a period of up to one year, but at some point, all of that money will have to be paid back. (If you want to learn more about the nuts and bolts of forbearance, you can check out our other article here).
This is leaving many homeowners worried that if they pause their loan payments, they will owe everything upfront when their forbearance period ends in a lump sum or “balloon payment.”
If a homeowner can’t make that payment and the loan servicer doesn’t offer them any alternatives, a default could be imminent.
Will your loan servicer require you to make a balloon payment at the end of forbearance under the CARES Act? Based on most recent FHFA update let’s go through each type of loan and summarize their guidelines:
At the end of April, a spokesperson for Freddie Mac, Fannie Mae, and Ginnie Mae announced that they would not require any of their borrowers to make balloon payments at the end of their forbearance.
However, it’s unclear what other alternative options will be offered. Not having to pay thousands of dollars all at once is great. But if the alternative is a deferment or permanent loan option how will that affect your ability to get credit later?
Some experts are saying the RE market may drop 10-15% (or more) some are saying rates may go down further than they are right now due to unprecedented economic turmoil. Do you risk losing the ability to refinance or purchase during what could be an opportunity of a lifetime?
Federal Housing Administration (FHA)
The FHA and VA haven’t made a big public declaration about balloon payments like Fannie and Freddie did, so it’s a lot harder to find what they’re promising.
Here’s the most up to date and official information we found on the subject, according to a new fact sheet on the Housing and Urban Development (HUD) government website:
- “FHA does not require lump sum payments.”
- If your loan was current or less than 30 days delinquent before March 1, 2020, you may qualify for the “COVID-19 Standalone Partial Claim” which will allow you to avoid a lump sum payment.
- If you don’t qualify for this, “FHA offers other tools to help borrowers repay their missed payments over time.”
Veterans Affairs Mortgages (VA)
This information also comes from the HUD factsheet:
- “Servicers of VA loans cannot require borrowers to make a lump sum payment immediately after a borrower exits a CARES Act Forbearance.”
- There is a suite of options available to help Veterans repay their missed payments over time.
What This All Means For You
Choosing to go into a CARES Act Forbearance is highly risky and should only be done as an absolute hail mary last resort due to the potential impact it could have on your credit in the future.
If you have a Fannie or Freddie loan (FHA or VA loan holders will probably fall under similar guidelines), you most likely won’t have to make a balloon payment when forbearance ends. These entities haven’t made many promises about how your home and credit will be protected and affected beyond that though…
They might help you figure out a way to afford your mortgage bill when you resume payments, but will your credit and future borrowing power end up ruined for 3-5 years (or more) as a result? Most big banks (i.e. – Wells Fargo, Chase, Bofa etc.) wouldn’t approve HELOC’s for clients with loan modifications that were +8x years ago.
The important thing to take away is to remember if you have no other option but forbearance, you must figure out what your repayment options are and how they will affect you before you commit.
What the Great Recession Taught Us
During and after the Great Recession, we saw a lot of loan modifications handed out. It took a few years, but as things progressed the Loss Mitigation departments were more organized, their communication improved, and the terms they offered clients were much better than what they offered at the beginning of the downturn.
From what we saw during the Great Recession, once the mortgage owners and servicers had better data to analyze and compare how they do when they allow people to keep their homes vs. short sale or foreclosure, they start giving out much better deals to the existing homeowners. It wouldn’t be surprising to see a similar situation in response to the current economic shutdown.
Need Some Advice Before Committing to a CARES Act Forbearance?
Have you talked to your loan servicer about repayment options but don’t know what to make of it? Or have you been affected by COVID-19 and have another mortgage, real estate, or property management related question?
Then contact us at IET Capital to set up a free call or virtual meeting. We’re happy to work through any mortgage or real estate issues that have come up due to the economic shutdown.
You can call or text us at (323) 412-9060 or send us an e-mail through our contact form.