Forbearance was an easy fix, but what happens now?

A mortgage forbearance plan was the best option for many homeowners just a few months ago.

Forbearance protected millions of people from the loss of their homes even if they couldn’t make monthly payments.

Now, for the first time, we’re beginning to see cracks in the system. Looming ahead are several major concerns.

• How will the homeowner repay “skipped” payments?
• With millions of forbearances in process, lenders could mistakenly consider payments late, triggering extra fees or even foreclosure proceedings
• Credit agencies could dole out late payment status on mortgages actually in forbearance
• Property tax authorities and homeowners insurance may not get paid, since those are typically included in the mortgage payment.

Most importantly: How do your lender’s actions during forbearance (and its potential mistakes) affect you?

No one knows all the answers. But here we’ll explore what we know, and what you should be asking your lender right now if your mortgage is in forbearance.

The forbearance plan — easy to enter, tough to exit

It has been easy enough to get a forbearance plan during the coronavirus pandemic.

Under the CARES act, all a homeowner has to do is call their mortgage servicer (the company that processes payments), mention they’ve been financially impacted by COVID-19, and ask for payment relief.

By July, according to Black Knight research, more than 4.1 million forbearance plans were in place. 

But the big question with forbearance is not whether you can get it; most borrowers can. It’s what happens next. 

How do you repay the money? And are borrowers in forbearance plans really being protected from delinquent marks and credit dings as promised?

What happens when forbearance plans end

There are several ways to deal with forbearance once it ends.

• Loan modification — Borrowers and lenders may agree to a loan modification. This can mean reducing the interest rate or adding unpaid months to the end of the mortgage term. This is not the same as refinancing. The original loan remains in place; it’s just that the terms for the rest of the repayment period have changed
• Payment plans — With a payment plan, the lender and borrower agree to repay forbearance money over time. For instance, your regular payment for principal and interest is $1,100 a month. You owe $5,500. You agree to restart your regular mortgage payments at $1,100 a month plus $150 extra to pay back the forbearance money. It will take about 37 months to repay the debt
• Combo plans — A loan modification and a payment plan are combined. The lender reduces the interest rate, and the borrower agrees to pay extra money each month to repay the forbearance savings. If the new interest rate is significantly lower than the original, the borrower may be able to keep their payments (including the extra amount for forbearance) equal to or lower than they were before
• Lump sum payment — The borrower elects to repay the entire forbearance amount from savings, investments, a retirement fund, etc. While a borrower can choose to make a lump-sum payment, a lump-sum payment cannot be required under government rules

Not all repayment options are available to all borrowers.

Talk to your loan servicer about options before the forbearance period ends, so you’re aware of what the repayment plan will look like and ready to resume payments when necessary.

Miscommunication leads to $4,700 bill

While forbearance repayment options may look neat and simple, that’s not always the case.

Borrowers may not have found employment by the time forbearance periods end. They may not be making as much income. And loan servicers may not be able to reduce interest levels without investor permission.

Worse, with a flood of new paperwork, the opportunity for lender errors increases.

With a flood of new paperwork, the opportunity for lender errors increases.

CNN reports that one borrower accepted a three-month deferral and saved $900 a month. She thought she owed $2,700 after the forbearance period ended. The bank thought differently. It said she owed $4,700.

It turns out, CNN reported, that the borrower’s mortgage was not among those protected by the CARES Act. 

It doesn’t seem like a stretch to assume many more of these errors and miscommunications will come out of the woodwork as more homeowners exit their forbearance plans.

That’s why it’s important to get ahead of any potential issues before they happen.

3 questions to ask before your forbearance ends

Be proactive. Ask about your mortgage and credit standing now so any mistakes can be caught and corrected early.

Here’s what you should be looking into:

1. How is my credit?

With millions of borrowers not making required payments, the potential for credit glitches is enormous.

Missed payments should not affect your score during forbearance. But if your forbearance plan is being misreported (or unreported), you want to know about it and get the issue corrected right away.

The good news is that until April 21, 2021, consumers can get free credit reports on a weekly basis at AnnualCreditReport.com. Reports from Experian, Equifax, and TransUnion are available.

Look for factual errors, items that are out of date, and new entries that seem odd or unusual.

2. What’s the status of my mortgage loan?

You’re likely only in contact with your loan servicer when you send in a monthly payment.

Today, homeowners have to be proactive. Mark your calendar to call your loan servicer well before your forbearance period ends.

• Make sure you’re clear about the terms of your forbearance plan (start and end date, expectations for repayment, etc.)
• Ask about the status of your account, including the current balance
• Make sure you’re not being marked as ‘late’ or ‘delinquent’ on any payments deferred under your forbearance plan

Unfortunately, it can be tough to get ahold of loan servicers right now. They’re dealing with millions of people in a similar situation.

Getting started early helps ensure you aren’t scrambling for a fix only finding out there was an issue with your mortgage.

3. How are my property taxes and homeowners insurance being paid?

Taxes and insurance bills are generally paid by loan servicers.

Most homeowners make a single, monthly mortgage payment that covers all their housing costs (besides HOA dues, which are usually paid separately to the homeowners association).

The borrower’s loan servicer splits up the payment and divvies funds out to the insurance company and property tax authority, typically the county.

But what happens when you’re not making mortgage payments?

When you call your servicer, make sure to ask whether these other payments are being made. You can also:

• Check your current property tax status. You can usually do this online with a city or county website. Look for late or missing payments. Print out the results for your records
• Call your insurance company or agent. Ask about your property insurance coverage. Has the loan servicer made required payments? Have they been timely? Is your coverage still in effect?

Why take these steps? Not paying taxes can lead to a huge sum owed in just a few short months. Additionally, your county can levy late fees. In extreme cases, the tax authority has the right to seize the home for non-payment of taxes.

Just as bad, unpaid homeowners insurance can lead to zero compensation if your home is damaged or destroyed.

Yes, these extra checks are not routine or normal. But our financial system has changed. It’s operating in the COVID-19 economy and that means a lot of old standards no longer apply. 

The bottom line

Forbearance plans have helped millions of homeowners free up their budgets and avoid foreclosure during the pandemic.

But this is an unprecedented time for lenders and banks — just like for borrowers.

Unfortunately, that means clerical errors can happen. Things can slip through the cracks. And one small administrative error for a lender can turn into a huge problem for a borrower.

So get ahead of any potential issues. Call your servicer well before your forbearance period ends. Make sure you’re clear on repayment terms. And keep an eye on your credit. These small steps can go a long way.