The federal Coronavirus Aid, Relief, and Economic Security (CARES) Act allows a homeowner with a federally backed mortgage loan, regardless of delinquency status, who's experiencing a financial hardship that's due directly or indirectly to COVID-19, to get a forbearance for as long as 360 days. (A forbearance is a suspension or reduction in payments. To learn more about eligibility requirements and how to get a CARES Act forbearance, read Mortgage Payment Relief During the Coronavirus Outbreak.)
During the forbearance period, principal and interest is deferred, and no fees, penalties, or interest beyond the regularly scheduled amounts will accrue on the borrower’s account. But the CARES Act doesn’t specify what happens to the portion of the payment that usually goes toward paying property taxes and homeowners’ insurance if you have an escrow account.
Fortunately, based on federal law and standard servicing practices, your servicer will probably let you defer making payments for escrow items during the forbearance. If your taxes or insurance comes due during this time, the servicer will most likely advance money to pay those bills if the account doesn't have sufficient funds to pay the expense.
With some mortgage loans, the borrower has to pay the servicer a specific amount each month to cover property taxes and homeowners' insurance, which are called “escrow items.” (Sometimes escrow items also include private mortgage insurance and homeowners' association dues.) After receiving your monthly payment, which includes principal, interest, taxes, and insurance (PITI), the servicer puts the amounts for taxes and insurance into a designated account called an “escrow account” or “impound account.”
Typically, the borrower pays approximately one-twelfth of the estimated annual cost of taxes and insurance each month. The servicer might also collect a cushion—ordinarily two months’ worth of escrow payments—to pay for unexpected increases in costs. The servicer pays for the escrow items on the borrower's behalf as the bills come due. Having an escrow account ensures that your taxes, insurance premiums, and the like, are paid on time and in full.
By making payments into an escrow account, you're essentially giving an interest-free loan to the servicer because, generally, you won't get paid interest on money in an escrow account (although a few states require it). For this reason, some people prefer to hold on to their money and pay the tax and insurance bills themselves. If you prefer to pay for these items on your own, you might be able to cancel your mortgage escrow account.
The CARES Act doesn’t specify how servicers should handle the portion of mortgage payments that goes toward escrow items. A previous version of the law, however, required the servicer to pay or advance funds for escrow items in a timely manner during the forbearance period. Even though this requirement wasn’t included in the final version of the CARES Act, Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA), generally governs how servicers should handle escrow accounts.
For instance, under certain circumstances, like when a borrower's mortgage payment is more than 30 days overdue, the servicer usually must keep an existing insurance policy in place if the borrower has an escrow account from which the servicer pays the insurance bill—even if the servicer needs to advance funds to the borrower’s escrow account. Also, property tax liens almost always have priority over other liens, including mortgage liens. So, the servicer will commonly advance money to pay property taxes to prevent a tax sale. Moreover, many servicers are interpreting the CARES Act as requiring forbearance for the escrowed part of borrowers’ monthly payments, along with the principal and interest.
Still, it’s a good idea to verify with your servicer that you don’t have to pay the escrow amounts during the forbearance.
You’ll eventually have to repay deferred escrow amounts, along with the principal and interest that you skipped during the forbearance. Generally, loan servicing guidelines permit borrowers to get caught up with a lump-sum payment (sometimes called a "reinstatement"), through a repayment plan, or with a loan modification in which the servicer adds the overdue amount to the mortgage balance.
If your mortgage doesn’t have an escrow account and you usually pay your insurance and taxes on your own, you should continue to make those payments.
To get specific information about what kind of mortgage help is available in your circumstances or to get a CARES Act forbearance, contact your loan servicer.
A local foreclosure lawyer can advise you about your legal rights under federal mortgage servicing laws and tell you about any state foreclosure laws. A HUD-approved housing counselor can provide you with helpful information (at no cost) about different mortgage-relief options.