by Maurie Backman | Published on July 31, 2021
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Have a loan that's about to exit forbearance? Here's what you need to know.
When the coronavirus pandemic first hit, millions of Americans found themselves out of a job within weeks. Thankfully, a host of aid was made available to the public -- stimulus checks, boosted unemployment benefits, and mortgage forbearance.
During forbearance, homeowners can stop making payments on their mortgages for a preset period of time without it negatively impacting their credit. Forbearance was an option before the pandemic, and it's something loan servicers could approve or deny at will. But during the pandemic, any homeowner requesting forbearance was entitled to it upon claiming financial hardship.
Under the CARES Act, which was signed into law in March of 2020, forbearance was initially set to last 12 months. But as the coronavirus crisis dragged on, it was extended to 18 months.
At this point, homeowners who put their mortgages into forbearance are starting to come up on that 18-month mark. And some borrowers may not have recovered financially from the pandemic. The good news is that those borrowers will now have more options for staying in their homes.
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Once mortgage forbearance ends, borrowers are expected to start paying their home loans again, all the while catching up on the payments they skipped. For some borrowers, this won't be an issue, and generally, payments missed during forbearance will be tacked onto the end of an existing mortgage. That way, borrowers won't have to come up with more money than their regular mortgage payments each month.
But not every mortgage borrower has recovered enough to start paying their monthly payments in full again. Now, the Biden administration is giving borrowers more options to reduce their mortgage payments following forbearance so they can stay in their homes even if they're still grappling with financial constraints.
Borrowers with conventional loans who can't make their payments after forbearance could see their mortgage terms extended to 360 months at today's mortgage rates, which are very competitive. That could reduce their payments by 25%.
Meanwhile, the USDA will also work with borrowers to reduce their payments following forbearance. Specifically, those with USDA loans will be offered the option to extend the terms of their loans and will be eligible for interest rate reductions. VA loan borrowers will have similar options.
Also, the Homeowners Assistance Fund has allocated $10 billion to help homeowners who have been impacted by the pandemic. Struggling mortgage borrowers who qualify for that relief can use those funds to catch up on their mortgage payments.
Changes to mortgage forbearance over the last year and half were designed to prevent a massive wave of foreclosures during the pandemic. Now, the Biden administration is acknowledging that more work needs to be done to stop a foreclosure wave this fall as borrowers exit forbearance in droves. It's estimated that 1.75 million homes are still in forbearance, so these options are likely to help a lot of people stay in their homes while they work on staging their own financial recoveries.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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