When the federal government passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, it included a number of provisions designed to help ease the financial burdens of those affected by the pandemic. In particular, the CARES Act includes a nationwide moratorium on foreclosures for all federally backed mortgages.
The moratorium is in effect as of March 18, 2020, and is in place until May 18, 2020. During this time, all in-progress foreclosure proceedings must be paused and no new foreclosure proceedings can be initiated on federally backed mortgages.
The provision is designed to prevent individuals and families from losing housing during the health crisis, which would present a threat to not only those evicted but also the surrounding communities.
Many homeowners have questions about how the moratorium works and how it can benefit them. Find the answers to some of those questions here.
Who Is Protected by the Moratorium?
The foreclosure moratorium only applies to federally backed mortgages. You are protected by the moratorium if your mortgage is owned or backed by any of the following entities:
Additionally, the moratorium only applies to residential mortgages, so small businesses or other nonresidential borrowers don’t qualify.
How to Use the Moratorium to Prevent Foreclosure
The foreclosure moratorium is more than just a brief pause in an inevitable foreclosure process. If your home was in the process of foreclosure, there are several things you can do during the moratorium period to prevent it from being foreclosed on:
1. Contact your loan servicer.
Even though the foreclosure moratorium is automatic—meaning, you don’t need to specifically request a moratorium to benefit—you should still contact your mortgage provider to explain your situation and ask what accommodations may be available.
The foreclosure moratorium is designed to resemble a similar clause in the FHA’s disaster relief protocols, which instruct lenders to use reasonable judgment in evaluating how best to help borrowers cope with a widespread threat like COVID-19.
To help your lender make this evaluation, you should be prepared to provide details on the nature of your financial hardship, supported by documentation.
2. Inquire about forbearance.
In some cases, lenders can help borrowers in danger of foreclosure enter into a forbearance plan instead. The CARES Act includes a requirement that allows all federal mortgage borrowers to place their mortgage into forbearance for 180 days, with an option to extend by another 180 days if necessary. (You must explicitly request forbearance to benefit from this.)
If you’re able to place your mortgage in forbearance, you’ll be able to remain in your home while pausing your loan for several months. During this time, you can take steps to improve your financial situation, stay current on other credit accounts, find or resume employment and make other arrangements necessary to put yourself in a position to go back to paying your mortgage as scheduled.
3. Inquire about a loan modification or partial claim.
Though not included in the CARES Act, there are several other mortgage relief options, like loan modifications or partial claims, that may be available to you depending on your lender’s particular policies.
A loan modification is a permanent change to the original terms of a mortgage that makes the loan more affordable by lowering monthly payments. Typically, this adjustment is balanced with an extension of the length of the loan.
Another option is a partial claim, which is a special no-interest loan from the Department of Housing and Urban Development (HUD) that helps borrowers catch up on their original mortgage. The partial claim doesn’t need to be repaid until after the original mortgage has been paid.
Two Alternatives to Foreclosure After the Moratorium
If you’re unable to use the moratorium period to save your home, there are alternatives to foreclosure that allow you to exit your agreement without permanently damaging your credit. These options still involve you losing your home, but they allow you to avoid drawn-out and often costly foreclosure proceedings.
During the moratorium period, take a hard look at your financial situation and decide whether or not you’re able to use one of the mortgage relief options available to you to remain in your home. If not, contact your lender proactively to agree on the best way to exit your mortgage agreement with minimal damage.
1. Deed in Lieu of Foreclosure
If you contact your lender, you may be able to negotiate a deed in lieu of foreclosure. This agreement allows you to voluntarily deed your property to the mortgagee in order to be released from the agreement and avoid engaging in foreclosure proceedings.
Deed in lieu of foreclosure has several benefits. Foreclosure itself can be a costly process, so voluntarily surrendering your home can actually save you some money. Additionally, this option allows you to keep the process relatively private in order to avoid some of the embarrassment of a public foreclosure announcement.
2. Pre-Foreclosure or Short Sale
Another option you may have is a short sale or pre-foreclosure sale, in which you will list your home at a price below what you owe on your mortgage. This allows you to reduce what you owe the bank to a more manageable debt amount, and lets you avoid the costly and public foreclosure process.
All of the options above require advance approval from your lender, so regardless of what path you plan to take, your first step is to contact your loan servicer as soon as possible.
How Does the Eviction Moratorium Apply to Renters?
Not all of the CARES Act’s homeowner protections apply to renters. For instance, homeowners can place federally backed mortgages in forbearance, but there’s no federal legislation allowing renters a similar ability to pause their monthly housing payments.
When it comes to the moratorium, though, qualified renters are protected from eviction during the moratorium. The bill also prevents landlords from evicting tenants after the moratorium without first giving 30 days’ notice. Notice of eviction can’t be given until after the moratorium ends.
The eviction moratorium only applies to certain renters living in “covered properties,” which are:
- properties with federally backed mortgage loans
- properties with federally backed multifamily mortgage loans
- properties participating in a “covered housing program” as defined by the Violence Against Women Act
- properties participating in the “rural housing voucher program under section 542 of the Housing Act of 1949”
The National Housing Law Project published a detailed list of properties that are covered under the conditions listed above.
Cases where renters are not protected include:
- evictions that were filed before the moratorium took effect
- evictions based on reasons other than an inability to pay rent or other charges
What to Do If You’re Not Qualified for Protection but Still Need Help
By virtue of how the moratorium qualifications are structured, there will be many people who are not covered by its protections but are still in danger of eviction. In this situation, there are a number of other options to pursue.
1. State and Local Protections
Though nonfederal mortgages and renters in non-covered properties are not protected by the federal CARES Act, many states and localities have instituted their own protections that go further than those in the federal law. For instance, New York City and Los Angeles have placed a complete moratorium on evictions, regardless of the property or whether it’s backed by a mortgage of any kind.
Many states also have pending or passed laws instituting partial or full moratoriums on evictions. Consult the National Conference of State Legislatures for an up-to-date record of state policies.
2. Individual Lender Flexibility
Just because the CARES Act doesn’t require your lender to extend housing relief doesn’t mean they won’t do so if you ask. If you’re concerned about your ability to make your mortgage or rent payment, contact your loan servicer or landlord proactively to explain your situation, detail how long you expect your financial hardship to last and make a specific request for help. Even small-property landlords may be willing to pause rent payments for a finite period of time if you explain your circumstances.
3. Other CARES Act Protections
Even if your rent or mortgage isn’t flexible during the pandemic, you may be able to take advantage of other provisions in the CARES Act to lessen your overall financial burden. For instance, you may be able to defer your federally backed student loan or borrow against your retirement account to cover your monthly expenses temporarily. If you’re unemployed, you may qualify for Pandemic Unemployment Assistance.
Regardless of whether you pursue national, state or local protections for your financial situation, it’s important to make sure you’re researching your options thoroughly and avoiding scams that have sprung up since the coronavirus outbreak.
With the right research, you can avoid or minimize the financial damage caused by the coronavirus crisis and set yourself up to recover from your hardships quickly.
Should you pay down debt or save for retirement?
While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.
Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.
If you have high-interest debt, pay it down
When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).
In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.
High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.
To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.
If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.
Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.
If you’re nearing retirement, start to save
The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).
Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.
Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.
Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.
Aim for both goals by improving income
As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.
The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.
If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.
For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.
While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).
How does a loan default affect my credit?
Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.
Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.
30 days late
Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.
The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.
More than 30 days late
Payments that are more than 30 days past due can trigger increasingly serious consequences:
- The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
- You may receive phone calls and letters from creditors demanding payment.
- If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.
Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.
Other ways a default can hurt you
Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:
- If you default on a car loan, the creditor can repossess your car.
- If you default on a mortgage, you could be forced to foreclose on your home.
- In some cases, you could be sued for payment and have a court judgment entered against you.
- You could face bankruptcy.
Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.
How to avoid a loan default
Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:
- For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
- For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.
Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.
Clean up your credit
The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.
Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.
How to identify credit repair scams
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
If you have poor or damaged credit and want to repair it, you may have considered using a credit repair service to help. Unfortunately, there are many companies and individuals that want to take advantage of unsuspecting consumers needing help with their credit.
While there are legitimate companies that can help you repair your credit, there are also credit repair scams that are only after your money and your information for identity theft purposes. To keep both safe, we created this guide to help you tell the difference between legitimate credit repair companies and credit repair scams.
Five signs of a credit repair scam
There are many things credit repair companies are not allowed to do or promise customers. If it sounds like it’s too good to be true, it probably is, and you should steer clear of that company. We’ve put together a list of signs you should watch out for when working with credit repair companies.
1. Guaranteed results
Under the Credit Repair Organizations Act (CROA), credit repair companies cannot guarantee results. Here are a few common examples of false promises unethical credit repair companies might make:
- Improvement to your credit score
- Results in a fixed time period
- Removal of all of negative items, even if they are accurate
2. Up-front payment is requested
The CROA prohibits credit repair companies from asking for any payment before they render services. Many scammers know that most consumers don’t know this and, as a result, promise a quick turnaround on credit repair for a large upfront payment.
Some illegitimate credit repair companies may not allow you to cancel unless you pay a fee. All credit repair companies are required by law to give you at least three days to cancel services with them and there is no penalty for canceling.
3. Claims a new identity is needed
A credit repair company can’t promise or offer you a new identity. Anyone offering you a new identity is a fraud. Besides guaranteeing results, scammers may try to promise you a clean slate with a new Employer Identification Number (EIN) or a Credit Privacy Number (CPN).
They tell you to use these numbers on your future credit applications instead of your Social Security Number. We explain more about common credit repair scams below.
4. Don’t explain your legal rights
Credit repair companies should explain your legal rights to you from the beginning. These are a few common things an unethical credit repair company might do.
- Tells you not to contact the credit bureaus directly
- Doesn’t give you a copy of the contract to review before signing
- Fails to inform you that you can repair your credit yourself without the help of a credit repair company
- Leaves out important information from the contract, like the date services will be executed or the amount you will pay
If you feel like the company isn’t telling you everything or refusing to answer your questions, you should seek services elsewhere.
5. Asks you to misrepresent information
Finally, an unlawful credit repair company might ask you to misrepresent your information. This can range from unlawfully using an EIN or CPN number in place of your social security number to claim you are a victim of identity theft when you’re not.
Common credit repair scams
You’ll most likely see credit repair companies illegally promising results. However, it’s important to familiarize yourself with other scams so you understand what is and is not legal. We highlighted a few common ones below.
File segregation schemes
A file segregation scheme is when a company or individual offers to give you an Employee Identification Number (EIN) to use in place of your Social Security Number when you apply for credit. It’s illegal for companies to do this, and it’s illegal for consumers to obtain one to use in place of their Social Security Number.
Credit privacy numbers
Like an EIN, a Credit Privacy Number (CPN) is created by scammers to use in place of your Social Security Number when applying for credit. Simply put, a CPN is a fake Social Security Number. Usually, these are created using somebody else’s identity, and using one can be considered identity theft.
Tradeline renting is when you pay for authorized user status so that the tradeline shows up on your credit reports to improve your score. This doesn’t repair any negative information on your credit, but adding a positive tradeline to your credit report can boost your score.
While this isn’t necessarily illegal, it can get you into trouble. There is nothing wrong with a loved one adding you as an authorized user. However, if you pay to “rent” a tradeline from a stranger, you don’t know how it will impact your credit and it may be a scam to get your money.
What to do if you are scammed
There are a few things you can do if you realize you’ve fallen victim to a credit repair scam. Take a look at your options below.
Can credit repair companies fix your credit?
Yes, a legitimate credit repair company can help you work to remove inaccurate negative items from your record that may be damaging your credit score. Here are ways to recognize a legitimate, expert credit repair company. Although you can work to repair your credit yourself without a credit repair company, ideally a credit repair company would make the process much easier. Here are some signs of a legitimate, expert credit repair company:
- They create a repair strategy custom to your unique situation. A good credit repair company will customize their course of action only after evaluating your credit reports and credit history. Everyone’s credit history is different, and their approach to repairing your credit should reflect that.
- Maintain communication with you during the process. A credit repair company that maintains scheduled calls, emails or any other form of communication with you will help you stay up-to-date with their progress. They shouldn’t keep you in the dark as they’re conducting their services.
- Informs you of your rights from the beginning. At the time of signing, a credit repair company should provide two documents: a disclosure of your right to repair your credit yourself and a detailed contract of services.
- Make realistic claims about their services. Like we said above, credit repair companies cannot guarantee results. A legitimate credit repair company will not guarantee timeframes or point changes, but they can guarantee the delivery of services—access to credit monitoring tools, or letters delivered on your behalf.
How to safely repair your credit
Making payments on time and disputing inaccurate information on your credit reports can help you repair your credit. While you can do this on your own, a professional credit repair firm like Lexington Law Firm will make the process easier and more efficient.
Lexington Law Firm proudly adheres to CROA to make sure we give our clients the best experience possible. For over a decade, we’ve helped clients challenge information that is unfair, inaccurate and unsubstantiated. Give us a call today for a free, personalized credit report consultation.
Reviewed by John Heath, Directing Attorney of Lexington Law Firm. Written by Lexington Law.
Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
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