What Do Biden’s Mortgage Protection Extensions Mean for You?

If you’re having a tough time paying your mortgage, the Biden administration is extending certain programs to help you. Previously, these protections — including a temporary stay on foreclosures, and options for forbearance — were set to expire at the end of March 2021. 

But seeing as we’re still not done with the coronavirus crisis yet. Although millions of people have been vaccinated and millions more doses are administered every day, some homeowners are still struggling with their mortgage. 

Depending on the type of mortgage you have and your timing, you might be eligible for help until June 30, 2022. To get that help, you’ll need to know how the programs work. 

Who’s Eligible for Mortgage Assistance? 

Only certain types of mortgages are covered by these programs. To qualify, you’ll need either a federally-backed or a federally-sponsored mortgage, which include these types of mortgage loans:

  • VA 
  • USDA
  • HUD/FHA
  • Fannie Mae
  • Freddie Mac

If your mortgage is held by a private lender, you’re unfortunately not eligible for assistance through these programs. This is similar to the situation with student loans; only federal student loans qualify for automatic deferment, whereas it’s up to individual private lenders to offer private student loan assistance at their discretion. 

If you have another type of mortgage, it’s worth reaching out to your lender to see what assistance they can offer you if you need help.

How Does the Mortgage Forbearance and Foreclosure Moratorium Extension Work?

The protections put in place by the previous administration were set to expire in March. The Biden administration renewed these programs, and they currently consist of two big types of support:

Foreclosure Moratorium

Normally, if you don’t pay your mortgage and you don’t negotiate a temporary forbearance with your mortgage lender, you’ll have your home foreclosed.

A moratorium on foreclosures for federally-backed mortgages is in effect right now, extended until June 30, 2021, eliminating the risk of foreclosure during this time. 

Foreclosure is a bit of a long process and can take several months. If you’re going through foreclosure now, the proceedings will be stopped until the moratorium deadline. If you’re not yet in foreclosure, but you’re not paying on your home loan and aren’t in forbearance, you won’t have foreclosure proceedings started against you until June 30. 

COVID Forbearance 

If you’re going through just a temporary hardship and your work will pick up again (or if you’re able to get another job), forbearance is a handy option. This gives you a temporary break in payments, hopefully until you can get back on your feet. 

With this COVID forbearance, things work a little differently and it’s important to understand the timelines. There are two types of forbearance you may qualify for:

Initial COVID Forbearance

This offers you a 180-day (i.e., six-month) break from payments. 

For HUD, FHA, VA, or USDA loans, you need to request initial forbearance on or before June 30, 2021, otherwise you won’t be eligible for any other COVID forbearance extensions if you need them later. 

For Fannie Mae and Freddie Mac loans have no deadline to request an initial COVID forbearance. But if you plan on applying for a forbearance extension later, you’ll need to have requested your initial forbearance by at least February 28, 2021. If you wait until June 30, 2021 like with HUD, VA, USDA, and FHA loans, you might be eligible for an initial COVID forbearance period but not an extension.  

Forbearance Extension

If you’re still in rough times after the initial forbearance period ends, you can request up to two three-month forbearance extensions, one at a time. This gives you a total of up to six additional months of forbearance. 

If you were already in forbearance, you’re eligible for a maximum of 18 months of forbearance total. You might bump into this deadline if your mortgage was already in forbearance from earlier in the pandemic.  

How to Request COVID Forbearance

It’s also important to know that forbearance is not automatic. If you’re having a tough time, you need to reach out to your lender to arrange forbearance. Otherwise, if you just stop paying your mortgage, you’ll be recorded as defaulting on your loan. 

And while this won’t cause you to be foreclosed on due to the foreclosure moratorium (until June 30, 2021, at least), it still severely damages your credit score. 

To request forbearance, reach out to your lender and request a “COVID hardship forbearance.” You don’t need to provide any documentation or any proof of hardship. There are also no fees or additional charges, although interest will accrue on your loan to be paid off later. 

Remember, you might qualify for up to a full year of forbearance (six months of initial COVID forbearance, plus a three-month extension in two separate periods). You have until June 30, 2021 to request the initial COVID forbearance for whatever type of covered federal mortgage you have. 

To ask for a forbearance extension, you’ll need to have first applied for that initial forbearance by February 28, 2021 (for Fannie Mae and Freddie Mac loans), or June 30, 2021 (for VA, FHA, USDA, or HUD loans). 

What Happens When Forbearance Ends?

Forbearance is a great way to keep your house and preserve your credit score if you run into a temporary financial hardship with COVID. But it’s not a free pass on payments. You’ll still need to pay back skipped payment from the forbearance window. How that looks when you restart payments can take several forms:

  • Lump sum. This is NOT required for any of the federally-backed or federally-guaranteed loans covered by this program. But if you have the financial ability, you can always repay those missed payments in one lump sum if you choose.
  • Deferral. You may be able to simply tack on those extra payments to the end of your loan. So, if you took a six-month break, for example, you’d simply pay your mortgage for six additional months before it’s paid off. 
  • Repayment plan. If you can afford slightly higher payments when you come back, you may be put on a repayment plan. This allows you to pay slightly more each month so you still pay off your loan by the originally-planned date. 
  • Modification. If you took a permanent pay cut when you get back to paying off your loan, your lender may be able to modify your loan so that your payments are lower moving forward. 

It’s up to your lender which of these options you may be offered. But rest assured, you won’t be required to pay back all of those missed payments in one lump sum.

FAQ

Here’s a quick rundown of the common questions people have:

Biden extended two relief protections for federally-backed or federally-guaranteed mortgages: a moratorium on foreclosures until June 30, 2021, and COVID forbearance options.

The new extensions only cover federally-backed or federally-guaranteed mortgages. This includes mortgages held by Fannie Mae and Freddie Mac, as well as USDA, VA, FHA, and HUD loans.

For HUD, FHA, VA, and USDA loans, you have until June 30, 2021 to apply for your first COVID forbearance period, which will last six months. There is no deadline to apply for COVID forbearance for Fannie Mae and Freddie Mac loans. To be eligible for the extensions, you’ll need to have requested the first forbearance by February 28, 2021.

For HUD, VA, FHA, or USDA loans, you can apply for up to two three-month extensions as long as you’ve requested your first COVID forbearance by June 30, 2021.

For Fannie Mae and Freddie Mac loans, you can also apply for up to two, three-month extensions. You’ll need to have requested your first COVID forbearance by February 28, 2021.

For covered mortgages, you can apply for up to a year’s worth of forbearance. If your loans are already in forbearance, you can only request up to 18 months maximum of forbearance.

No; you need to request it from your lender. Unlike the program for federal student loans, payments on your mortgage are not automatically paused.

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Why Refinance Rates Are Higher Than Purchase Loan Rates

Mortgage interest rates dropped dramatically over the summer, to the point where home loans have never been cheaper in most of our adult lifetimes. With rates at historic lows, you might’ve considered taking advantage of them, either by purchasing a new home or refinancing your current mortgage.

Recent figures from Freddie Mac show that mortgage refinances surged in the first quarter of 2020, with nearly $400 billion first home loans refinanced. However, as it turns out, refinancing your mortgage might actually be more expensive than purchasing a new home. 

This surprised us, too — why would there be a difference at all? 

We investigated how refinancing rates and new purchase home loan rates are set, and found several reasons for this rate disparity. On top of the rate difference, mortgage refinancing is even more difficult to qualify for, given the current economy.

Before rushing to refinance your home, read on to gather the information you need to make the right financial decision for your situation.

Pandemic Effects on Home Lending

Just as mortgage rates have stumbled, banks and lenders have tightened the screws on borrowers due to COVID-19, requiring higher credit scores and down payment amounts. Chase, for example, raised its minimum FICO score requirements for home purchases and refinances to 700 with a down payment requirement of at least 20%. 

Low rates have also driven a massive move to mortgage refinances. According to the same Freddie Mac report, 42% of homeowners who refinanced did so at a higher loan amount so they could “cash out.”

Unfortunately, homeowners who want to refinance might face the same stringent loan requirements as those who are taking out a purchase loan. Mortgage refinance rates are also generally higher than home purchase rates for a handful of reasons, all of which can make refinancing considerably less appealing. 

How Refinance Rates Are Priced

Although some lenders might not make it obvious that their refinance rates are higher, others make the higher prices for a home refinance clear. When you head to the mortgage section on the Wells Fargo website, for example, it lists rates for home purchases and refinances separately, with a .625 difference in rates for a thirty-year home loan. 

There are a few reasons why big banks might charge higher rates to refinance, including:

Added Refinance Fees

In August of 2020, Fannie Mae and Freddie Mac announced it was tacking on a .5% fee on refinance mortgages starting on September 1. This fee will be assessed on cash-out refinances and no cash-out refinances. According to Freddie Mac, the new fee was introduced “as a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty.”

By making refinancing more costly, lenders can taper the number of refinance loans they have to process, giving them more time to focus on purchase loans and other business.

Lenders Restraining New Application Volume

Demand for mortgage refinancing has been so high that some lenders are unable to handle all requests. Reluctant to add more employees to handle a surge that won’t last forever, many lenders are simply limiting the number of refinance applications they process, or setting additional terms that limit the number of loans that might qualify.

Also note that some lenders are prioritizing new purchase loans over mortgage refinance applications since new home buyers have deadlines to meet. With the housing market also on an upswing in many parts of the country, many major banks and lenders simply can’t keep up.

Rate Locks Cost Money

Generally speaking, it costs lenders more to lock the rate for refinance loans when compared to purchase loans. This is leaving lenders disinterested in allocating resources on the recent surge in mortgage refinance applications.

This is especially true since many refinancers might lock in a rate with one provider but switch lenders and lock in a rate again if interest rates go down. Lenders exist to turn a profit, after all, and it makes sense they would spend their time on loans that provide the greatest return.

Tighter Requirements Due to COVID-19

According to the Brookings Institute, Fannie Mae and Freddie Mac have been asking lenders to make sure any disruption to a borrower’s employment or income due to COVID-19 won’t impact their ability to repay their loan. 

Many lenders are also increasing the minimum credit score borrowers must have while making other requirements harder to meet. As an example, U.S. Bank increased its minimum credit score requirement to 680 for mortgage customers, and it also implemented a maximum debt-to-income ratio of 50 percent.

This combination of factors can make it difficult to save as much money with a refinance, or to even find a lender that’s willing to process your application. With this in mind, run the math and to see if refinancing is right for your situation before contacting a mortgage lender.

How Mortgage Purchase Rates Are Priced

Mortgage purchase rates are priced using a similar method as refinance rates. When you apply for a home mortgage, the lender looks at factors like your credit score, your income, your down payment and your other debt to determine your eligibility.

The overall economy also plays a giant role in mortgage rates for home loans, including purchase loans and refinance loans. Mortgage rates tend to go up during periods of speedy economic growth, and they tend to drop during periods of slower economic growth. Meanwhile, inflation can also play a role. Low levels of inflation contribute to lower interest rates on mortgage loans and other financial products.

Mortgage lenders can also price their loans based on the amount of business they have coming in, and whether they have the capacity to process more loans. They might lower rates to drum up business or raise rates when they’re at or nearing capacity. This is part of the reason rates can vary among lenders, and why it always makes sense to shop around for a home loan.

Many people believe that the Federal Reserve sets mortgage rates, but this is not exactly true. The Federal Reserve sets the federal funds rate, which lenders use to ensure they meet mandated cash reserve requirements. When the Fed raises this rate, banks have to pay more to borrow from one another, and these costs are often passed on to consumers. Likewise, costs can go down when the Fed lowers the federal funds rate, which can mean lower costs and interest rates for borrowers.

The Bottom Line

Refinancing your existing mortgage can absolutely make sense in terms of interest savings, but don’t rule out buying a new home instead. Buying a new home could help you save money on interest and get the space and the features you really want. 

Remember, there are steps you can take to become a more attractive borrower whether you choose to refinance or invest in a new place. You can’t control the economy or the Federal Reserve, but you have control over your personal finances.

Improving your credit score right away, and paying down debt to lower your debt-to-income ratio are just a couple of strategies to start. And if you’re planning on buying a new home, make sure you save a hefty down payment amount. These steps help you improve your chances at getting the best rates and terms whether you choose to move or stick with the home you have. 

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