Mortgage Payment Suspension: Covid 19 Your Options
The impact of Covid 19 on the US economy is going to have a lasting impact that no one can predict. Many of us will be required to suspend mortgage payments resulting from hardships. How should you work with your bank to suspend mortgage payments?
- What is the difference between deferring, forbearance, and forgiveness?
- Who is offering programs to for mortgage payment suspension?
- How do you qualify for mortgage forbearance and deferring programs?
- Will the forbearance impact my credit score?
- Will I be charged late fees during my suspended mortgage payments?
- Will I be charged interest during my suspended mortgage payments?
- How to manage short term income for deferred, forbearance, and forgiveness programs
For those that have mortgages and will not be able to pay your monthly mortgage payment, various payment assistance programs have been offered by banks. In many cases, your states are also stepping in to work with the banks to provide relief. What are those programs and how can you use them? Most importantly, how should you manage your income if you do qualify for one of those programs? Before you jump in and accept mortgage suspension, make sure to continue reading below for tips and information you need to know.
What is the difference between deferring, forbearance, and forgiveness?
Understanding what type of program your bank is offering is extremely important as there are major differences in your obligations and impact on your future expenses and credit score. Every bank is handling this crisis differently and because of that, it can be confusing to understand what you would be getting.
The first step is to ask what type of mortgage assistance programs are being offered. There are typically three different types of assistance programs offered by banks:
Defer: Defer assistance programs simply let you suspend your mortgage payments for a set time period determined by the bank. During that period you will not have to make mortgage payments, however, in most cases, interest will continue to accrue. Depending on the specific details of your loan and how long you defer your payments, the cost can be minimal to multiple thousands of dollars.
Things to consider:
- Payments at some point will be made up.
- Can extend the term of your loan by the months you defer.
- Interest can accrue on deferred payments.
Forbearance: Forbearance programs let you suspend your mortgage payments (or some amount of your payment) for a set time period. At some point, however, you will be required to pay back the payments. These programs can help for a cash crunch but can cause further issues when the money is due.
Suspend payment on your mortgage for 3-months (based on what most banks are offering currently for Covid crisis). In this type of program, you will be able to suspend your payment for 3-months, at the end of 3-months, you will be required to pay back the missed payments.
Point to consider:
- Given that the current crises, forbearance programs may not actually help all that much since it would be unlikely for most people to save the three months of suspended payments if they have no income.
- Until you repay the missed payments, further interest will continue to accrue.
- If you can not pay back the missed payments, it may impact your credit rating and/or be assessed late fees.
Given the nature of the current crises, it seems that banks will have to consider these problems and offer some form of extension, forgiveness, or mortgage payment suspension. If you take a forbearance program, unless you can repay the amounts due per the terms of your program, you will probably have to make a second phone call and enroll in a debt assistance program your bank may be offering.
Other forbearance program types:
- Payments paused and due 1-year after the end of the period.
- Payments paused and due at the end of the mortgage.
- Payments paused and you continue to pay interest on them until you pay them back before the end of the mortgage.
Most forbearance programs follow the same formula, suspend payments (or portion of) and payback those amounts over some defined period.
Forgiveness: Forgiveness programs come in many different shapes and sizes. They can range from simply forgiving some payments to forgiving balances on the mortgage.
During the housing crisis, there were many loan forgiveness programs that helped people either reduce their principle, their interest, or loan type to make payments fit their budget.
Forgiveness programs often require an application from the mortgage holder to enter a debt program the bank is offering by documenting the loss of income or other hardships. Once approved, a bank representative will typically work your case and present options.
Things to consider:
- Debt or payment forgiveness can impact your credit score.
- It may not be possible to refinance in the future.
- You may owe taxes on the debt that was forgiven.
How do you qualify for mortgage forbearance and deferring programs?
Qualifying for any of the programs currently being offered requires you to contact your bank. Since customer support lines have been impacted from the covid 19 outbreak, many banks offer online forms for the standard programs they offer.
Your first step is to understand the program being offered and make sure you know how to apply. Once done, then you should attempt to call the bank and confirm your understanding and then follow the steps to enroll if you agree with the terms of the programs.
Who is offering programs for mortgage payment suspension?
Many of the banks are offering help with mortgage payment suspension. The programs being offered are vastly different from bank to bank, but most are offering some type of payment suspension for 60-90 days. Here are some links to the big banks that are offering to enroll or apply to their programs:
|Banks of America
|Bank of America Forbearance
| Chase Forbearance
|Union Bank Home Assistance
|1 (855) 839-6253
|1 (888) 444-9876
|Wells Fargo Impacted Assistance
Will the forbearance impact my credit score?
When trying to decide if you will take a mortgage payment suspension program offered by your bank, you must always consider the impact on your credit score. In some cases, the program can have a large impact and in others, it may have no impact.
Most loan forbearance programs offered currently will not impact your credit, however, you must check with your bank. It all depends on how they report the deferring of payments, the terms of how you repay, and the timeline. It can be extremely confusing. If you enter into any of these programs, make sure you get in writing the terms of the program so that you can correct miss-represented credit impacts.
Likewise, most loan forgiveness programs will impact your credit since the bank is essentially writing off amounts due to them. The other impact on these types of programs can also be the tax liability on the amount you were forgiven.
Will I be charged late fees during my suspended mortgage payments?
Again, it really depends on the bank forbearance program. Many that I have reviewed defer the late fees but accrue interest. If your bank says you will be charged late fees, it is best to call them and see if they can be waived.
Late fees are entirely up to the bank to decide and can often be negotiated as long as you have lived up to the other terms of your loan.
Will I be charged interest during my suspended mortgage payments under a forbearance program?
For most, the answer is yes. Banks still have a cost to the money that they lend to you, this is their way to cover their expenses. How the interest accrues can be different from bank to bank.
For some programs, you might have the option to pay interest-only payments during the forbearance period. This essentially lowers your monthly payment until you resume normal payments.
For other banks, the interest is accumulated and added to the balance of your loan and due at some point (either the end of the forbearance period or the end of the loan). This can be a bit complicated so it is best to make sure you understand the terms your bank is offering.
For example, in the program being offered by Bank of America, the amount deferred is immediately due after the forbearance period. This means you will be expected to pay the missed payments. If the payment can not be made, late fees and credit impacts could apply. Although, Bank of America may change that policy and if you call them they do suggest calling them at the end of the period to make further arrangements if you can not pay the balance due.
As you can see, it can get complicated depending on your needs and ability to make payments due.
In another example, some banks add the missed payments to the end of the mortgage or may create a balloon payment at the end. If this is being offered, you must understand the cost and how interest is being accumulated on that balance as it can add up significantly.
How to manage short term income for deferred, forbearance, and forgiveness programs
Managing your finances during the short term program will be key to your success to exit the program. Failing to do so may lead to further hardship and penalties. Here are some ways to minimize the risk of further problems:
- Keep paying the payments to yourself if you can.
If you entered a program to make sure you have money for unforeseen problems, the best thing you can do is make the deferred payments into a savings or other account to accumulate.
By doing this, you preserve the cash if needed, but if not needed you can repay the deferred payments and not incur any penalties or extra interest from the bank.
- If you have a reduction in salary, pay proportionately into your savings the amount you would have paid for your mortgage payments.
This one is probably one of the most important to understand but also may not be achievable depending on your other fixed expenses.
It can feel very overwhelming with a significant reduction in income and many people who enter some type of deferment program divert all that money to expenses. Here is the problem, it temporarily masks the real impact of the loss of income and can cause further problems when the deferred period is over.
To help prevent future problems, defer the same proportion of income to your mortgage payment than you did before the loss of income.
For example, if your salary was $80,000 and you lost your job and are now collecting unemployment with other benefits that total $40,000, you had a 50% drop in income. If your mortgage payment was $2,000 per month, the proportion was 30% of your income. So, you should divert into a savings account 30% of your new income or $1,000 per month.
This keeps your expenses balanced. Of course, your other bills might not have gone down and you might need the cash so it might not be possible in every case, but you should try to keep the ratio as close as you can. This money saved will help you with future emergencies or negotiate with the bank the exit of your program.
- Cut all non-essential spending and divert any savings to a savings account.
It may seem a bit odd to try to save in times like this, but this is really an opportunity to cut expenses and see how those savings add up.
Tracking what your saving on gives you confidence and a bright spot in an otherwise dire circumstance. Many do small savings every day but don’t really see the benefit. Here is your chance and how to do it.
Divert actual savings: This one is simple if you are buying something online or at a retail store and you use a coupon or coupon code, divert the amount saved into your savings. For example, sometimes on Amazon a coupon appears that you’re not expecting. If that coupon saved you $10, then divert $10 to savings.
Divert planned spending not spent: This one is a bit more subjective, but for example, if you were on your way to buy a cup of coffee for $5 and then for whatever reason did not buy it, then you should divert $5 into your savings. The theory behind this is that at that time you felt the cost of the coffee was worth the cost and impact on your finances. By diverting the money on these types of choices, you will see your savings add up and see how much of an impact they really have over time.
If you can achieve these two simple methods, you might start to accumulate some needed cash in these uncertain times.
- Set up a simple budget (don’t over underestimate the power of simple)
Many banks are offering different types of mortgage payment suspension programs to get you through for the next 60-120 days with some form of mortgage payment suspension or deferral. While these programs can help, it is extremely important to understand the details of each program and make sure you talk with your bank to understand how to enroll and exit.
Lastly, while you are enrolled, most programs will require the money to be repaid. During this period, make sure you also practice good savings habits and make sure you set money aside when possible. The money you set aside may be very helpful at a future point.
If you have had any experience in these programs offered, please share your experience in the comments below!