In recent months, Americans struggling to pay their bills amid a wave of job losses due to the coronavirus pandemic have looked for opportunities to pay mortgage interest deductions. According to the Mortgage Bankers Association, nearly 4.3 million homeowners had forbearance plans in the first week of June.
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What is mortgage interest deduction?
It is first important to understand how tolerance works. Forbearance is when your mortgage servicer or lender allows you to temporarily pay your mortgage at a lower payment or to pause your mortgage for a period of time.
According to the Consumer Financial Protection Bureau (CFPB), “forbearance can help you cope with hardships, such as if your home was damaged by a flood, you had an illness or injury that increased your health care costs, or if you lost your job.” However, the agency explains, “forbearance doesn’t erase the amount you owe on your mortgage,” adding, “you will have to pay back missed or reduced payments.”
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, individuals with federally secured mortgages who are experiencing financial difficulties as a result of COVID-19 can request a grace period by contacting their mortgage servicer. Federally secured mortgages include mortgages guaranteed or insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Department of Agriculture (USDA), or loans purchased or securitized by Fannie Mae and Freddie Mac.
According to the CFPB, people with a federally secured home loan have the right to request an extension of up to 180 days. You also have the right to request one extension to 180 days, and the CFPB says there are no additional fees, penalties, or additional interest (outside of the scheduled amounts).
The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, also provides payment forbearance to borrowers affected by COVID-19 for up to 12 months.
Does it affect a borrower’s credit?
In “normal” times, a mortgage interest deduction is recorded on a borrower’s credit report and would likely negatively impact their score. However, under the CARES Act, mortgage accounts that are in default as a result of COVID-19 cannot be negatively reported to the credit bureaus.
“If a borrower uses a mortgage interest deduction program, it will be listed at the top of the credit report, but it will not affect the actual score,” said Wayne Lacy, branch manager at Cherry Creek Mortgage Company. “I’ve seen credit reports of borrowers who are tolerant, yet have scores above 800.”
Will this affect future loans?
While forbearance doesn’t affect credit scores, it’s still considered a financial hardship, and initially meant a 12-month wait before a borrower could apply for a new mortgage.
But Lacy reminds us that we are in unprecedented times and that mortgage relief guidelines have changed from week to week, sometimes even day to day.
“Recently, Fannie and Freddie announced that they do not consider a COVID-19-related toleration to be ‘a normal historical crime,'” he said. “And instead of the 12-month rule, borrowers can now refinance their current loan or apply for a new mortgage after three months.”
Lacy says under new guidelines, a borrower who is in eligibility will be eligible for a new loan if all payments are current and the borrower has made at least three consecutive on-time mortgage payments after ending the forbearance. The money used to power the borrower must be documented and the source of the money must be what is normally accepted – gift money, savings, 401K payout, etc.
While forbearance can be a good source of financial relief for people affected by the pandemic, experts say if you’re still working and can afford to make mortgage payments, you should.
For those who are really struggling to make payments because of COVID-19, Lacy says applying for forbearance should be considered, regardless of whether it affects your future borrowing ability.
“If you start missing payments and haven’t entered a forbearance program, that will definitely affect your credit score and you probably won’t be eligible for a new mortgage anytime soon,” he said. “But before making a decision, it’s best to consult your lender to make sure you’re getting current information and sound advice.”
For a list of local professionals, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.
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