With the coronavirus (COVID-19) outbreak happening, you might be among the many people finding it difficult or impossible to keep up with your mortgage payments. Fortunately, most people won’t face the prospect of losing their home soon, thanks to foreclosure suspensions across the country. Also, federal law generally prevents the initiation of foreclosure until the borrower is more than 120 days overdue on payments. Plus, most borrowers have access to a number of loss mitigation alternatives.
To understand your options, you need to know who owns or backs your mortgage loan. Your loan might be owned by a bank or investor, or it might be guaranteed by some other entity like FHA or VA. These agencies, which were set up by the government, support and finance the housing market by ensuring that the loan owner gets paid even if the borrower defaults.
Different entities have their own rules about loss mitigation. Servicers sometimes get confused and don’t tell you about all of your options. So, you should know who owns or backs your loans and what your rights are based on that information. If you have an FHA-insured loan, you’re most likely eligible for payment forbearance, as well as perhaps one or more of several loss mitigation alternatives available through FHA’s "waterfall" process.
Forbearances for FHA-Insured Loans
Under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, homeowners with federally backed mortgage loans, including those with loans that are FHA-insured, can put off paying their mortgage for up to 360 days—almost a year—with a forbearance.
The forbearance period lasts up to 180 days and can be extended up to 180 more days if you ask for an extension during the "covered period" (see below). Some servicers, though, are initially offering a shorter 90-day forbearance to start. Again, federal law provides extended relief—as many as 360 days. If you need help enforcing your rights, consider hiring a foreclosure lawyer to help you.
Eligibility Requirements For a Forbearance
The right to get an extended forbearance under the CARES Act applies to mortgage loans secured by a first or subordinate lien on residential real property, including individual units of condominiums and cooperatives, designed principally for the occupancy of from one to four families.
How to Get a Forbearance
To get a forbearance, you need to contact your servicer within the covered period and affirm that you've suffered a financial hardship due to the COVID-19 emergency. But the servicer can't require you to provide any additional documentation other than your attestation.
No Fees, Penalties, or Extra Interest Under the CARES Act
While you're in a forbearance period, the servicer can't add fees or penalties to your account. It also can't charge interest beyond the amounts scheduled or calculated as if you made all contractual payments on time and in full under the terms of the mortgage contract.
What Is the Definition of "Covered Period"?
The relevant section of the CARES Act doesn't define the term "covered period" during which you must ask for a forbearance. But you should probably make your request before December 31, 2020, or the termination date of the COVID-19 national emergency declaration, whichever is sooner. This definition of "covered period" is set out in a different part of the CARES Act, which deals with forbearances for federally backed loans on multifamily properties. (To learn more, see Mortgage Payment Relief During the Coronavirus Outbreak.)
If you want to get an extension on an initial forbearance, make your request before the original forbearance period ends.
What Happens When the Forbearance Period Ends
Keep in mind that a forbearance isn't the same as loan forgiveness; you'll still owe the skipped amounts after the forbearance period ends, plus your usual monthly payment. So, if you can pay your mortgage, you should continue to do so.
One problem with the CARES Act is that it doesn’t explain how borrowers will be expected to pay back the money after a forbearance period. Usually, the servicer will:
- take a lump-sum payment
- offer a payment plan, or
- provide a modification in which the unpaid amounts get added to the loan balance. (If you apply for a modification, you'll most likely have to send supporting documentation, including copies of your bank statements and tax returns, to the servicer then.)
Servicers are sometimes telling borrowers they'll have to pay a lump sum when the forbearance is over. But in a Q&A for homeowners dated April 17, 2020, FHA stated "a lump sum repayment for the total missed payments is not required immediately at the end of the COVID-19 forbearance period." Instead, pursuant to Mortgagee Letter 2020-06, your servicer must evaluate you to see what loss mitigation options might be available. First, it has to evaluate you for a COVID-19 National Emergency Standalone Partial Claim (see below) no later than the end of the forbearance period. If you don't qualify, the servicer has to evaluate you for other loss mitigation options.
So, assuming you can't afford to do so, you can probably avoid having to make an out-of-pocket lump-sum payment when the forbearance ends. Again, if you need help enforcing your rights, consider hiring a foreclosure lawyer to help you.
FHA’s Loss Mitigation Waterfall
In the usual waterfall process, the servicer has to, subject to a few exceptions, figure out which of the following foreclosure alternatives are appropriate for the borrower, if any. The servicer must evaluate the borrower for these options in a specific order. Once a borrower qualifies for a particular option, the evaluation ends.
Forbearance
If you've suffered a financial hardship due to COVID-19, you’ll most likely get a forbearance plan under the CARES Act. But under regular circumstances, FHA usually allows a borrower to get an informal forbearance (usually lasting three months or fewer), a formal forbearance plan (lasting longer than three months), or a special forbearance for unemployed homeowners.
Repayment Plan
With a repayment plan analysis, the servicer evaluates whether the borrower has enough income to support resuming regular monthly payments, plus paying a portion of the overdue amount until caught up on the debt.
Loan Modification
A modification under FHA guidelines could lower your interest rate, capitalize what you owe, or extend the time you get to repay the loan.
Partial Claim
A partial claim is an interest-free loan from HUD that brings a first mortgage up to date by paying off the overdue amounts. You don’t have to repay the loan until the first mortgage is paid off, like when you sell the property. Sometimes, the servicer will complete a partial claim along with a modification.
FHA offers a COVID-19 National Emergency Standalone Partial Claim as an option following a CARES Act forbearance. This kind of partial claim reinstates a borrower's loan by authorizing the servicer to advance funds on behalf of the homeowner. The partial claim is, again, an interest-free subordinate mortgage that the borrower doesn't have to repay until the first mortgage is paid off.
Pre-Foreclosure Sale (Short Sale)
A pre-foreclosure sale is what HUD calls a short sale. The borrower sells the home for less than what's owed on the loan. If the loan is FHA-insured, the lender can't get a deficiency judgment after a pre-foreclosure sale.
Deed in Lieu of Foreclosure
With a deed in lieu of foreclosure, you give the deed to the property (title) to HUD in exchange for a release from all obligations under the mortgage. Like with a pre-foreclosure sale, the lender can't get a deficiency judgment after a deed in lieu if you have an FHA-insured loan.
How to Find Out If You Have an FHA-Insured Loan
To find out what kind of loan you have, call your servicer. You could also:
- Check for an FHA case number on your mortgage contract. (But loans sometimes lose their FHA-insured status, so contact your servicer or HUD’s National Servicing Center at 877-622-8525 to find out about your loan specifically.)
- Review your billing statement to see if you pay a mortgage insurance premium (MIP). MIP is what FHA calls its mortgage insurance. If you’re paying MIP, then you have an FHA-insured loan.
If you don’t have an FHA-insured loan, most servicers are offering various alternatives to help homeowners get through the COVID-19 crisis.
Speak to a HUD-Approved Housing Counselor or Foreclosure Lawyer
To learn about different ways to avoid a foreclosure, consider talking to a (free) HUD-approved housing counselor. A housing counselor can help you understand the specific options available to you if FHA insures your loan, or if another entity owns or guarantees your home loan.
To learn about foreclosure laws and procedures in your state, and your rights during the process, talk to a foreclosure attorney.
