What loan forbearance is—and what it’s not.
During this COVID-19 pandemic, we’re seeing a health crisis shift to a financial crisis. With so many Americans being laid off, furloughed, or taking pay cuts, it’s understandable that many are wondering how they’re going to pay bills. The good news is, the government has a plan to try and keep the nation afloat, which includes mortgage loan forbearance.
If you’re experiencing financial hardship due to the recent pandemic, a forbearance may help you, but it’s not free money. If your financial standing hasn’t been significantly impacted and you’re thinking it might be nice to skip some mortgage payments, be careful. Wherever you stand, it’s important to understand the risks of loan forbearance before you apply for it. During this COVID-19 pandemic, we’re seeing a health crisis shift to a financial crisis.
The Rundown on Loan Forbearance
WHAT IS THE CARES ACT?
First, if you’ve been paying any attention to the news lately, you’ve probably heard about the government working on a stimulus package to offset the financial and economic burdens many Americans are facing as a result of the pandemic. This emergency relief legislation is called the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. It’s important for you to know what the CARES Act is because a portion of it is intended to provide relief to homeowners in the form of mortgage loan forbearance.
Under the CARES Act, borrowers may be eligible for up to 12 months of loan forbearance (depending on the servicer). In order to be eligible, you must have a federally backed mortgage, and you have to be able to confirm that you’ve been financially impacted by COVID-19.
INVESTORS VS. SERVICERS
Second, let’s break down some important mortgage lingo. Your mortgage is owned by an entity, also known as an investor. If you get a mortgage through Cardinal Financial, the investor could be Fannie Mae, Freddie Mac, Ginnie Mae, VA or it could be Cardinal Financial.
There is another key party involved in mortgage loan forbearance: the servicer. The servicer is the company that services your loan. Essentially, it’s the company you write your monthly mortgage payment checks to. When you close a loan with Cardinal, your servicer is Dovenmuehle Mortgage, Inc., or DMI.
If you are a Cardinal customer, and you’ve had your mortgage for a while, it’s possible your servicer is no longer DMI and you write checks to another company. That’s because, for many borrowers, eventually, your loan may be sold to another investor and serviced by another company. This is a normal practice in the mortgage industry.
All of this is critical to understand because loan forbearance guidelines are specific to the investor, and forbearance requests have to be taken up with the servicer.
FORBEARANCE VS. FORGIVENESS
Third, it’s important to note that loan forbearance is not the same as loan forgiveness. Forgiveness means you don’t ever have to pay it back; forbearance means you’ll have to pay back the payments you skipped at some point in the future. The timeline by which you pay back those skipped payments is not specified in the CARES Act; rather, it’s determined by your servicer.
WHERE LOAN FORBEARANCE MAY HURT YOU
If you’re one of the millions of Americans who are unemployed and bringing home considerably less income due to the recent coronavirus, the mortgage loan forbearance offered through the CARES Act was made for you. But, if your finances haven’t been severely impacted, you might want to be careful about applying for forbearance. Here’s why:
- You may have to make a large payment at the end. In many cases, the full amount owed must be paid at the end of the forbearance period—often as a balloon payment. If you are truly experiencing financial hardship, your servicer may have options to assist you further, but that will be determined on an individual basis.
- Interest will still accrue. Your mortgage will stop amortizing for the duration of the forbearance, but it will continue accruing interest. In the end you’ll have a higher payoff amount. Forbearance may be advantageous in the short run, but it could negatively impact your home equity in the long run.
- There may be credit impacts. Your credit score or your ability to apply for credit in the future may be impacted if you are not able to bring your loan current at the end of the forbearance period.
- You may not be able to refinance in the near future. Rates are at historic lows, so for many borrowers it may be a good idea to refinance to a lower rate. However, you won’t be able to refinance until after your forbearance ends. Additionally, you must be current on your mortgage, which limits your ability to refinance and capitalize on low rates.
So you have this information on loan forbearance; now what? As a Cardinal customer, where do you start?
First, if you’re experiencing financial hardship due to the pandemic and it looks like forbearance is the way to go, submit a request to our servicer, Dovenmuehle Mortgage, Inc. Instructions are on our COVID-19 Assistance page.
If your financial standing hasn’t been significantly impacted but you’re still looking for ways to save, call us and let’s explore your refinance options. With the low rates we’ve recently seen, you could refinance for a lower rate and monthly payment, or get a cash-out refinance and tap into your home equity to pay off other debt.
The bottom line is, we have refinance options that could put money back in your pocket without getting into a forbearance agreement.
Article written by Laura Lopez and reprinted with permission by Cardinal Financial.