Talk-show hosts and economists will hotly debate the wisdom of closing down the economy to reduce the spread of COVID-19 for years to come. The truth is, nobody really knows what the effect would have been if the government hadn't issued stay-at-home mandates. What we do know is that we are experiencing a ripple effect of the shutdown in many industries, including real estate.
One of the immediate financial effects was predictable: a rising unemployment rate leading to a surge in mortgage holders struggling to make their monthly payments.
A new federal law, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was passed to protect borrowers who have federally backed mortgages. If your loan is not backed by one of the federal agencies, this act will not apply to you. These agencies include HUD, USDA, FHA, VA, Fannie Mae, or Freddie Mac.
The Mortgage Relief Act has two effects:
- It issues a foreclosure moratorium for 60 days after March 18, 2020, and
- it provides a right to forbearance (of up to 180 days) to homeowners experiencing financial hardship due to the COVID-19 pandemic.
Many mortgage lenders have reacted with some form of mortgage relief program that doesn't depend on the act. How the repayment occurs depends on your mortgage provider. While each company decides its own specific policies, there are four major relief options available:
This is when a servicer or lender allows you to pause your mortgage payments for a limited period of time, typically a few months. You then repay the missed payments as a lump sum at the end of the designated timeline. While it's certainly helpful to pause payments if you are unable to work, it can be nearly impossible to pay the lump sum of all missed payments as soon as you go back to work.
- Temporary relief from monthly payments when you are unemployed or your hours are reduced
- Guaranteed if your loan is government-backed and you can provide proof of financial hardship
- Missing payments will not be reported to credit bureaus during the Act's forbearance period
- Long wait times and other customer service issues when you call your mortgage provider, as servicers are inundated with forbearance requests
- You might not be able to afford the “balloon” payment due at the end of the designated forbearance term
- You must, in fact, be suffering financial hardship due to the COVID-19 shutdown.
This also allows you to pause making mortgage payments. This option lets you tack the missing payments on at the end of your mortgage loan. It extends the term of your loan by the number of missed payments.
- Temporary relief from monthly mortgage payments
- No balloon payment at the end of the designated term
- Missing payments will not be reported to the credit bureaus during the Act's forbearance period
- Long wait times when you call
- Extends the term of your loan, which increases the total interest owed on your loan
Keep in mind that there's an overlap and confusion in the industry concerning the definitions of forbearance and deferment. So, be sure you read and understand all the terms and conditions of any mortgage relief option you choose. And it's important to remember that forbearance and deferment are not mortgage forgiveness. You still have to pay back what you owe.
3. Loan Modification
This is when the lender provides you with new loan terms that make it easier for you to continue making regular payments. That could mean extending your loan payback. This lowers the amount of payment due. For example, the monthly principal and interest due on a $250,000 loan at 3.5% if financed over 15 years is $1,787. The principal and interest for that same loan financed over 30 years is $1,122, making it more affordable during a time of financial hardship. And your interest rate could be lowered, which also reduces the amount of each payment.
- Permanently lowers monthly mortgage payments
- No closing costs if your lender works out a loan modification with you
- Loan modifications do not necessarily need to go through underwriting so that the process can happen quickly
- May extend the term of your loan and increase the total interest owed on your loan
- New terms may or may not be beneficial long term
This is when you take out a new loan to replace your current mortgage. Cash-out refinancing can help during times of hardship if you have some equity in your home. For example, let's say you owe $150,000 on your home, and it's worth $250,000. This means you have $100,000 equity in your home. A cash-out refinance could provide a lump sum payment to you that you can use to get your through the hardship. Or you could refinance your mortgage to a lower interest rate or longer-term, thereby reducing your monthly mortgage payments.
- Access to cash in your pocket
- Possibly achieve better financing terms (such as a lower interest rate)
- Could permanently lower monthly mortgage payments
- Depleting or reducing the equity in your home means increasing your debt
- You have to pay closing costs
- The refinancing needs to go through underwriting, which may take 45–60 days
In order to be eligible for forbearance protection under the CARES Act, your mortgage must be backed by one of the federal agencies: HUD, USDA, FHA, VA, Fannie Mae, or Freddie Mac.
Steps Borrowers Facing COVID-19–related Hardships Should Take
The Consumer Financial Protection Bureau advises that if you can financially afford to pay your mortgage despite financial changes, it's best to pay your mortgage.
Reach out to your mortgage servicer immediately to review all your options. Do this even if you can make a partial payment. Don't ignore your situation, thinking it'll work out. Call your lender as soon as you realize you need a mortgage relief solution of any kind.
Many of the name-brand mortgage lenders, such as Bank of America, Ally Bank, and Suntrust Bank, have come out with specific programs for affected borrowers. Options include offering a deferment of 90 or 120 days and tacking the skipped payments on at the end of the loan. But nothing is done automatically. So, you need to call and make arrangements.
Many lenders are handling requests on an individual basis. That means you'll need to check your mortgage provider's website. There you can access general policy information and a phone number to call and talk with a customer service representative who makes an assessment on a case-by-case basis.
Be sure to have the information you need in front of you before you call. It'll save you time and aggravation if you can provide a complete picture of your current financial situation so the lender can determine the best option for you. SunTrust's website advises you gather these docs before calling:
- Most recent two pay stubs, along with the current year's W2 (if applicable). Or your last two years' tax returns if self-employed or you received rental income
- Information about any additional income (unemployment income, rental income, etc.)
- Your mortgage payment information and account numbers (most recent statement)
Steps Real Estate Investors With Mortgages Should Take if Their Tenants Can't Pay rent
The hardship presents a unique problem if you're a rental property investor with mortgages supported by income that's not being paid by tenants experiencing COVID-19 related hardships. You too will need to reach out to your lender to determine your specific mortgage relief options. But you have an additional first step.
- Before you call your lender, talk with your tenant. Gather from them the information to prove that the loss of their job (or other reason related to hardship caused by the pandemic) is preventing them from paying rent.
- Gather all your mortgage documents rental income/expense ledger and personal information to give to the customer service representative. The process will likely be a little more involved than for an owner-occupied home mortgage. And you will likely have to build a case that you are unable to pay the mortgage out of other personal income. You'll need to show that the tenant's lack of payment results in financial hardship for you.
While many states have enacted legislation to temporarily halt evictions for nonpayment of rent due to financial hardships of COVID-19, that doesn't mean the rent is not due. It's similar to essential utility companies like electric, water, and gas companies. They cannot stop service during this time, but the cost of usage is not forgiven. Tenants must still pay rent, and landlords can continue collecting rent that's due. The best approach is to work out a payment plan with your tenants.
Once you start receiving mortgage relief as a borrower, make sure you keep good financial records. And take good notes when talking with your assigned customer service representative.
Beware of Scammers
During any consumer crisis, scammers are at work, creating ways to take advantage of people who let their guard down. And we're all under stress, increasing our vulnerability to a scammer who promises a quick and easy solution.
Always carefully check the URL of any links before you click. (Hover your cursor over the hyperlink and look at the URL that shows up. You'll see it at the bottom of your window.) Scammers often create a website that looks very legitimate but has an extra character in the link that takes the unsuspecting to a fake site. And your personal information is then requested, collected, and used.
Don't ever give out your personal information over the phone unless you initiated the call and are sure you're talking with a company you trust and with which you already have an account or relationship.
Figure Out a Solution Before It's Too Late
How long the shutdown will last, and how many mortgages will be affected is still unknown. According to the Mortgage Bankers Association (MBA), the total number of loans in forbearance jumped from 3.74% to 5.95% during the week ending April 12, 2020. Ginnie Mae's loan forbearance rate grew the most, jumping from 5.89% to 8.26%. Mike Fratantoni, MBA's Chief Economist, expects an increase in forbearance inquiries as we approach May payment due dates.
The bottom line is that if you are worried about making your mortgage payment (or any of your recurring monthly bills), reach out to your provider as soon as you realize there's going to be a problem. While the majority of companies are willing to work with customers during this challenging time, if you wait to call the day before your payment is due, they probably cannot make any accommodations in time to defer late charges and penalties.