If you’re a homeowner with a federally backed mortgage who is struggling financially during the coronavirus outbreak, you should know the CARES Act offers mortgage relief in the form of a foreclosure moratorium as well as options for placing your mortgage in forbearance.
Following the outbreak, many people are unemployed or otherwise struggling financially. One of the most difficult monthly obligations to manage is a mortgage payment. Especially when mortgage terms include a high monthly payment, even one month of unemployment or financial hardship can put borrowers behind on their home loan.
Thankfully, the CARES Act includes protections for homeowners with qualified mortgages, who are enduring financial trouble due to the coronavirus outbreak. Here we’ve broken down the coronavirus mortgage relief options available and detailed how homeowners can take advantage of them.
What Are the Two Mortgage Relief Options?
The two mortgage relief options included in the CARES Act are mortgage forbearance and a moratorium on house foreclosures. Specifically, the CARES Act states that:
- Homeowners with federally backed mortgages who are experiencing financial hardship due to COVID-19 can request a 180-day forbearance on their mortgage, which can be extended another 180 days at the borrower’s request.
- Federally backed mortgage servicers cannot initiate a foreclosure, conduct a foreclosure hearing or execute a foreclosure sale or foreclosure-related eviction until May 18, 2020.
How to Find Out If You Qualify for CARES Act Mortgage Relief
To find out if you’re eligible for the mortgage relief protections in the CARES Act, you need to determine if your mortgage is backed by a federal entity. You can figure this out by looking up your mortgage online, calling your mortgage servicer or sending a request in writing to determine who owns your mortgage.
Nearly half of all mortgages in the United States are backed by Fannie Mae or Freddie Mac. You can use these look-up tools to determine if yours is one of them:
In addition to Fannie Mae and Freddie Mac, other federal agencies that back mortgages are:
How to Request a Mortgage Forbearance
The moratorium on foreclosure procedures is automatic for those with federally backed mortgage loans. If you have a federally backed mortgage and your home was in the process of or about to enter foreclosure, you can anticipate that those proceedings will be halted until May 18, 2020. During this time, you can contact your servicer to inquire about getting a forbearance, instead. It is important to contact your mortgage servicer to make sure your foreclosure proceedings have been halted.
If you decide you need to request a forbearance, these are the steps to take:
1. Gather the relevant information.
You’re going to need several pieces of information during the process of requesting mortgage relief, so it’s best to gather them ahead of time. Be prepared to provide:
- Your loan account number
- The cause of your financial hardship and its relationship to the Coronavirus (COVID-19) outbreak
- How long you expect the hardship to endure
- Personal financial details, like income, unemployment benefits, expenses and your current assets
These are the basic details you should have on hand, but individual loan servicers may have other recommended requirements. You should check your individual provider’s website to be certain.
If you’re in the military and currently on orders, you’ll want to let your servicer know that as well.
2. Call your mortgage servicer.
Keep in mind that your mortgage servicer is not the same as the entity that owns or backs your loan. Typically, a bank or mortgage broker will act as your loan provider, and (in the case of federally backed loans), the entity that owns the loan will be a federal organization like Freddie Mac or the United States Department of Agriculture.
To request mortgage relief, you need to contact your loan servicer. Their contact information should be included in your monthly mortgage statement.
During the Coronavirus (COVID-19) crisis, you should anticipate a long hold period when you call your servicer. Since mortgage relief requests are currently at a peak, it will likely take longer to reach your provider.
3. Ask for the help you need.
Once you’re connected with a representative from your loan provider, ask for the mortgage relief you need. Since different states and individual loan providers may offer additional relief options besides those explicitly included in the federal CARES Act, you should begin by simply asking what mortgage relief options are available to you.
In addition to forbearance, which is mandated for federally backed loans, your servicer may offer loan modification options or waive your late fees.
Your servicer will likely ask for information like what financial hardship you are experiencing, how long you expect to need relief, and the details of your current financial situation, which is why you should have this information readily available when you call.
In the process of this conversation, your servicer will let you know what your options are and what you need to do in order to activate them.
4. Follow up in writing.
Once you and your loan servicer have settled on a mortgage relief option that works for you, be sure to request a written document reflecting what you discussed and the details of your agreement’s terms. Be sure to clarify the end date of your forbearance period and what is required of you after the fact.
In some cases, you can resume monthly payments as usual, while some forbearance agreements require a lump sum payment at the end of the relief period. Be sure you’re prepared to satisfy the terms of your agreement exactly as they’re laid out.
What to Do After Receiving Mortgage Relief
Even after being approved and receiving mortgage relief, it’s important to stay on top of your relief agreement and resume payments as soon as you’re able.
Here are best practices for moving forward after reaching a mortgage relief agreement:
- Work to protect your credit. Since missed mortgage payments without an approved forbearance will damage your credit, it’s important to ensure your servicer accurately recorded your forbearance agreement and your paused payments aren’t reflected on your credit. Now might be a good time to request one or more of your three free annual credit reports to check for and dispute errors.
- Keep paying other expenses. The CARES Act contains many options for putting off monthly payments without penalty, so it’s essential that you continue to stay on top of your other bills, if you’re able. Mortgage relief can protect your credit, but only if you’re not delinquent on your other accounts during this time.
- Keep an eye on your mortgage. Keep the paperwork from your forbearance agreement on record and continue to review your monthly statements as thoroughly as you would if you were making payments. If you spot an error, dispute it immediately.
- If you have extra cash flow, consider making partial payments. If you’re working part-time or receiving unemployment benefits, you may find you have some extra income despite not being ready to resume regular mortgage payments. In this case, consider making partial mortgage payments even while your loan is in forbearance. You’re still going to owe the entirety of the loan later, so putting down extra now will lighten your financial load later on.
- Resume payments as soon as you’re able. If you resume work while your mortgage is in forbearance, be sure to contact your servicer to resume your mortgage payments right away. It can be tempting to let your payments remain paused, but a shorter forbearance period means less financial burden for the remainder of the loan.
How to Find State-Level Mortgage Relief Options
Many states have passed coronavirus relief laws that expand on the protections included in the federal CARES Act. When investigating your financial relief options, be sure to look up protections offered at the federal, state and local levels. Individual mortgage servicers are also opting to offer their own accommodations, so you should inquire with your loan officer directly as well.
How to Decide If You Should Ask for Mortgage Relief
Mortgage forbearance is available to anyone with a federally backed mortgage who has experienced a coronavirus-related financial hardship. If you fit these qualifications but are capable of paying your mortgage—whether through cash reserves or other personal resources—the best course of action is to continue making mortgage payments.
From a strictly ethical perspective, relief aid should be reserved for those who absolutely need it most. Mortgage servicers can only accommodate a certain number of relief requests at once, so it’s important that their resources be allocated to those who are most in need.
Beyond ethics, it’s also smartest strategically to continue paying your mortgage whenever possible. Pausing mortgage payments unnecessarily can make payments more difficult down the line, and you may not have the same mortgage relief options available in the future. When it comes to home loans, paying earlier is usually the better option when possible.
As you navigate the complicated world of financial relief during the coronavirus outbreak, keep in mind that many of the provisions in federal, state and local laws require the individual to proactively request relief. That means you need to know what benefits are available and how to access them rather than anticipating that relief will come to you. In fact, any relief options that do come to you directly may be scams, so be sure to vet all relief offers diligently before entering into an agreement.
Does Getting Joint Credit Cards Have an Impact on Both Spouses’ Credit?
While marriage can help you improve your financial situation, it does not automatically mean that you and your spouse will share a credit report. Your credit records will remain separate, and any joint accounts or joint loans that you open will appear on both of your reports. While this can be advantageous, it’s critical to remember that joint account activity can effect both of your credit scores positively or negatively, just as separate accounts do.
Users Who Are Authorized
An authorized user is a user who has been added to an existing credit account and has been granted the authority to make purchases. Authorized users are typically issued a card bearing their name, and any purchases made by them will appear on your statement. The primary distinction between an authorized user and a shared account owner is that the account’s original owner is solely responsible for debt repayment. Authorized users, on the other hand, can always opt-out of their authorized status, although the principal joint account owner cannot.
If your credit score is better than your spouse’s as an authorized user, he or she may benefit from a credit score raise upon account addition. This is contingent upon your creditor notifying the credit bureaus of permitted user activity. If your lender does report authorized users, the activity on your account may have an effect on both you and your spouse. However, some lenders report only positive authorized user information, which means that late payment or poor usage may not have a negative effect on someone else’s credit. Consult your lender to determine how authorized users on your account are treated.
Joint Credit Cards Have an Impact on Your Credit Score
Opening a joint credit account or obtaining joint financing binds both of you legally to the debt’s repayment. This is critical to remember if you divorce or separate and your spouse refuses to make payments, even if previously agreed upon. It makes no difference who is “responsible,” the shared duty will result in both partners’ credit histories being badly impacted by late payments. Regardless of changes in relationship status or divorce order, the creditor considers both parties to be liable for the debt until the account is paid in full.
Whether you’re happily married or divorced, you and your spouse may decide to open separate credit accounts. Most creditors will enable you to transfer an account that was previously joint to one of your names if both of you agree. However, if there is a debt on the account, your lender may refuse to remove your spouse’s name unless you can qualify for the same credit on your own. Depending on your financial status, qualifying for financing and credit on a single income may be tough.
While creating the majority of your accounts jointly with your spouse may make it easier to obtain financing (two salaries are preferable to one), reestablishing credit independently following a divorce or separation is not always straightforward. To make matters worse, your spouse may wind up causing significant damage to your credit rating following the separation, either intentionally or through irresponsibility – making the financial situation much more difficult.
Before you rush in and open accounts with your spouse, take some time to discuss the shared responsibility of these accounts and what you and your husband would do in the event of a worst-case situation. These types of financial discussions can be difficult, especially when you rely on items lasting a long time, but a mutual understanding and respect for each other’s credit can go a long way toward keeping your score when sharing an account.
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.
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