Millions of mortgage borrowers have already applied for loan forbearance because of the uncertainty brought by the Coronavirus Disease of 2019 (COVID-19). However, some homeowners who have called their servicers were advised that they need to make a balloon payment once the deferment period ends. A balloon payment could be overwhelming if the pandemic has affected your finances.
As the millions of mortgages in forbearance is expected to double, you need to understand what a balloon payment is and what other relief options are available if you’re experiencing financial hardship and considering getting a loan forbearance.
Just recently, news came out about a homeowner in Washington who spoke with her lender about deferring her monthly payments after losing her job. Although she was allowed to suspend her monthly payments, she was terrified after the documents state that she could be forced to pay everything all at once including interest. “I’m pretty much terrified as to what would happen at the end of 90 days or 180 days if suddenly the bank wants thousands of dollars in a balloon payment”, the 60-year-old rural of Enumclaw resident said.
“I’m pretty much terrified as to what would happen at the end of 90 days or 180 days if suddenly the bank wants thousands of dollars in a balloon payment”.
You need to pay all missed payments at the end of the forbearance
In simple terms, a balloon payment means you need to pay all of your missed payments at the end of the forbearance period to make your payments updated. If your lender allows you to suspend making payments for 6 months, you need to repay all of your missed payments in a lump sum in the seventh month to become current with your payments. If you lose your job or if your working hours are significantly reduced, a balloon payment could be overwhelming because there’s a large (balloon) payment waiting for you at the end of the forbearance period. In some situations, the interests on your missed payments may continue to accumulate until you repay it all.
FHFA says balloon payment in forbearance is one of the options
The Federal Housing Finance Agency (FHFA) clarified in a statement that the lump sum payment at the end of a forbearance period is not a requirement. The FHFA stated that some servicers have told borrowers that they need to repay everything back at the end of the forbearance. This is because when the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became a law in March, it didn’t detail what would happen at the end of the forbearance period. Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac both confirmed FHFA’s clarification about the option of a balloon payment.
The CARES Act expects to benefit millions of borrowers whose loans are owned by the GSEs, and those that were secured by FHA, VA, and USDA. Struggling borrowers, including those whose loans are not owned by the government, are advised to immediately call their servicers and ask what other relief options are available for them, aside from making a balloon payment.
Ask your servicer for other relief options and negotiate
If you asked for a loan forbearance to suspend your payments and you think it’s impossible to pay a lump sum at the end of the forbearance period, let your servicer know about it. Your servicer could offer you other repayment options. Spreading the total amount of your missed payments across your succeeding payments and extending your loan term to repay all of your missed payments are just some of the repayment options you may want to ask.
A month before your forbearance period ends, your servicer must call you and re-evaluate your situation. At this point, you may want to negotiate if you think your financial hardships will continue. Some borrowers find it ideal to seek help from a certified housing counselor to better understand their options when speaking with their servicer.
If you believe your servicer is not cooperating or giving you other repayment options, consider filing a complaint with the Consumer Financial Protection Bureau (CFPB). Since April, the Bureau has received more than 42,000 complaints, about 60 percent of which were about the complainant’s incapability to repay at the end of the forbearance period. According to CFPB Director Kathleen L. Kraninger, “There’s a crystal clear line on the lump-sum payment issue. They’re not going to have to pay it if they can’t pay it”.
In a loan forbearance where you ask to defer your monthly payments, a balloon payment is a large payment that you may need to make when the forbearance period ends. It’s just one of the several repayment options available if you cannot pay the large amount at the end of the forbearance period. You need to discuss your financial hardships to your servicer if you believe paying a lump sum at the end of the forbearance period is impossible. When asking for a forbearance, keep in mind that it doesn’t erase the monthly payments you missed. You have to repay all of those missed payments, depending on the repayment option you and your servicer have agreed to.