What to expect when student loan and mortgage forbearance ends

What to expect when student loan and mortgage forbearance ends

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For millions of Americans who are out of work during the coronavirus pandemic, a break from mortgage and student loan payments is a necessary relief.

Forbearance is a period of time where you’re not held responsible for repaying your debt or loans, either in part or in full. Generally, forbearance comes with an end date, and at that point, you’ll be responsible for your payment again. But, you’ll still repay your debt eventually — the lender may add extra money to your monthly payments once they resume, or extend your loan’s term. 

When forbearance ends on your student loan or mortgage, make sure you’re in shape to make payments again. If not, consider asking to extend your forbearance, or ask your lender for other options. 

Federal student loan forbearance

Most federal student loans are in forbearance until December 31, 2020, with interest rates set to 0% and  automatic payments paused. While it was previously set to expire on September 30, forbearance has been extended by an executive order. 

Anyone who wants to remove the forbearance from their student loan to make payments as usual will need to contact their loan servicer to continue payments.

Forbearance does not apply to some borrowers of federal Perkins loans, or Federal Family Education Loan (FFEL) borrowers, nor private student loan borrowers or anyone who has refinanced to private loans from federal student loans.

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Expect a notice before forbearance ends

Language in the CARES Act requires that the Office of Federal Student Aid contact borrowers before the period ends. If your student loan is still in forbearance, you’ll be notified six times starting August 1, 2020, by mail, phone, or email. 

Your first payment will be due in January

While forbearance ends on December 31, your first payment won’t be due on that date. The first payment will be due in January, as long as the federal forbearance isn’t extended again.

Interest rates will resume December 31

Once your forbearance period ends, your student loans will start accruing interest again. Your interest rate will resume to whatever it was before the forbearance period ends. Federal student loan interest rates are based on the school year which you borrowed the loans, and what type of loans you borrowed. 

Forbearance will add time to your payoff plan

Your loan’s payoff date will move back as many months as your loans were in forbearance.

Your monthly student loan payment will still be the same as it always was. Federal student loan borrowers on income-based repayment plans will be able to count the months of forbearance towards their eventual loan forgiveness, whether loans were paid during that time or not. 

Federally backed mortgage forbearance carries extra protections for borrowers

It’s possible to put a mortgage in forbearance if you’re facing financial hardships during the coronavirus pandemic. For borrowers with federally backed mortgages, there are some extra protections in place.

Several types of federally backed mortgages, including FHA loans, VA loans, USDA loans, and loans through Fannie Mae or Freddie Mac, qualify for some special forbearance provisions through the CARES Act. These loans can be serviced through many different lenders, but your mortgage information should indicate if your loan is a type of federally backed mortgage.

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Up to a year’s worth of forbearance is available

The CARES Act specifies that federally backed mortgage borrowers can have 180 days of forbearance, and are allowed a 180-day extension. However, the CARES Act allows mortgages to keep accruing interest at the same rate as usual during forbearance, and most will. 

There are four ways missed payments can be made up

When your forbearance ends, you’ll start making payments again. You’ll also need to make up missed payments.  Mortgage companies Fannie Mae and Freddie Mac specify that there are four possible options to repay your missed payments. 

  • Full repayment: Missed payments are made in one payment when your forbearance ends.
  • Repayment plan: Borrowers choose a length of time to repay missed payments over time in addition to monthly payments. 
  • Payment deferral: Starting July 1, 2020, missed payments can be moved to the end of your mortgage. Missed payments will be tacked on to the end of the loan when the mortgage matures, the house is sold, or when refinanced. 
  • A loan modification: The loan’s original terms are changed.

Get in contact with your mortgage lender to determine the best method for you. 

Conventional mortgages don’t have a standard policy — each lender’s requirements are different

If you have a conventional mortgage, your mortgage’s repayment will look different than the federally backed loan repayment plans. Without a federal mandate in the CARES Act, conventional mortgages are different in their repayment, and each lender’s plans look different. 

Many major banks and mortgage lenders offered assistance to homeowners impacted by the coronavirus, including Chase, HSBC, and Bank of America. Each of these lenders will have their own plans for repayment, and their own period of time that forbearance will last.

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In general, there are three ways conventional mortgage lenders will handle repayment: by requiring a lump sum payment at the end of the forbearance period, by creating a payment plan to spread the missed payments over time, or by tacking the missed payments to the end of the mortgage. Here’s how a few popular lenders are structuring their repayment process: 

  • Bank of America: Missed payments added to the end of the loan.
  • Fifth Third Bank: Payments due at the end of the forbearance period, either made over time or at once. Payments can only be added to the end of the loan through a loan modification plan.
  • Rocket Mortgage by Quicken Loans: Payment due at the end of forbearance period, over time or in a lump sum. 

Contacting your mortgage lender is the best way to find out any specific details your lender may have in place.

Editor’s Note: This post has been updated to clarify that the CARES Act requires that the office of Federal Student Aid contact borrowers, not the individual lenders. Additionally, not all Perkins loans are exempt from forbearance, and forbearance can apply to Parent PLUS loans.