You may be ‘needlessly delinquent’ on your mortgage. Here’s what to do.

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If you’ve gone delinquent on your mortgage payments since the start of the COVID-19 pandemic, you’re not alone. According to the Urban Institute, about 400,000 homeowners went into mortgage delinquency between March and July, but it turns out most of those borrowers shouldn’t be delinquent at all.

That’s because the federal government passed a forbearance provision as part of the CARES Act, which allows homeowners to pause their mortgage payments for up to 180 days, then request an additional extension of 180 days.

If you’re struggling to pay your mortgage now, or if you’ve already gone into delinquency since the start of the pandemic, here’s what you need to know about the options available to you.

What is mortgage forbearance?

Forbearance is basically a time-out on your mortgage (or other loan) payments.

If you enter into forbearance, you can temporarily stop making payments, but it won’t affect your credit score because your lender will still consider you current on your debt.

It’s important to be in close contact with your lender though. You won’t automatically be placed in forbearance if you stop making payments, and the terms of your payment pause may vary by lender, though it’s common to have the missed principal and interest tacked onto your principal balance with no lump sum due when you restart payments.

How do I know if I qualify for forbearance?

Again, it’s important to talk to your lender, but you almost certainly do, especially if you’re struggling to make payments as a direct or indirect result of the coronavirus pandemic.

Michael Neal, a senior research associate at the Urban Institute and co-author of the post about “needless delinquencies” said in many cases lenders have not been proactive about letting their customers know that forbearance is an option, so it’s a good idea to check.

Neal also said lenders should do broader outreach to let their customers know if they qualify for forbearance.

All mortgages backed by Fannie Mae and Freddie Mac are eligible for forbearance. You can find out if your mortgage is backed by the agencies here. Many lenders who hold their loans and don’t sell them to the agencies are also offering forbearance.

Can I still go into forbearance if I’m already delinquent on my payments?

Yes, and you probably should.

“That would be really beneficial a) because they would be able to keep their home and b) they wouldn’t have to take a huge credit hit,” Neal said.

Pausing your payments will give your budget more breathing room and may help you recover from a tight financial situation. Eventually, you will have to start paying your mortgage again, but lenders may give you payment plan options to help you get back on track.

Neal acknowledged, though, that borrowers facing long-term unemployment won’t see much benefit from modified repayment plans.

“As we continue to see a shift in unemployment from temporary furloughs to more permanent unemployment, that does create a challenge in terms of the impact a modification would have,” he said. “If you modify the loan and restructure the payment, that’s not going to be as helpful if you don’t have a job and can’t make your payment anyway.”

What will happen to my credit score if I go into forbearance?

Forbearance itself won’t affect your credit, though your score may have already taken a hit if you stopped making payments. However, even if you go into forbearance after becoming delinquent, your credit won’t be further affected.

Neal also pointed out that the goal of forbearance is to help people stay in their homes even if they’re temporarily struggling to pay, but in more dire circumstances, forbearance could be a helpful precursor to a sale, too.

“As a first strategy at scale, I would not advocate selling by people who are delinquent,” he said, but added that the current seller’s market could offer a decent escape hatch in some circumstances.

“If you were to hypothetically sell your home, there is likely to be a level of housing equity that would help you” make up your delinquent debt.

Bottom line

The economy has taken a hit during the coronavirus pandemic, and the recovery has been uneven. If your personal finances have been affected by the situation and you’re struggling to stay current on your mortgage, you should be in touch with your lender about going into forbearance. There’s no risk to your credit, and putting off your payments may help provide some needed flexibility in your budget.

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