If there is one word in the mortgage world today that gets thrown around more than any other since the COVID-19 pandemic started, it is forbearance. Forbearance is the act of refraining from the legal right to enforce payment of a debt. Most all servicers of mortgage debt in the past two months have enacted some level of allowance for payment relief for their customers, if necessary.
Over 40 million Americans have filed for unemployment since mid-March. Over the course of the same time, 3.5 million homeowners have requested some period of forbearance from making their house payment.
There are several important pieces of information that consumers should know prior to considering forbearance.
1. Do not do anything without contacting your mortgage servicer. They will lay out potential options for you surrounding forbearance. It is best to understand your options and understand the implications of the commitment you are making before you decide upon forbearance. Each lender has their own rules.
2. Know that forbearance is NOT forgiveness. While you may be eligible to take anywhere from a month to a year off your immediate payment plan, there will be repayment of that debt sooner or later. Some servicers will extend the term of your loan, some will adjust your monthly payment to a higher amount once you are out of forbearance until the “owed” debt is repaid, and some will require the entire debt to be paid as soon as you are out of your forbearance time allotment (meaning, the entire amount is all due at once). Most consumers don’t understand that the full 90-120 days of delayed payments are due at the end of that period, which would immediately put them in default.
3. This increase in forbearances has had some consequences for prospective home buyers – such as the tightening of credit guidelines. Many lenders are requiring better credit scores, more stable job history, lower debt-to-income ratios and a higher percent of down payment. When a customer is granted forbearance from their mortgage servicer, the mortgage servicer must still pay the investor in most cases. So, no monthly payments from the consumer coming in the front door, but the debts still must be paid. In most cases, mortgage servicers are required to make those payments on the consumer’s behalf to the end investor for principal and interest, the county tax office, and the homeowner’s insurance agent. Currently, there are several proposals from the government to step in and help mortgage servicers with some of these losses, which are well into the billions of dollars.
4. While the government has said that in this time period, forbearance may not impact your credit score negatively, most mortgage providers will not allow a person to refinance or take out a new mortgage for 2 years after a forbearance. Please do your due diligence to understand your short term and long term options before moving quickly on a decision to do forbearance. As many experts say, make your house payment if you can, no matter what.
Finally, if you are experiencing true financial hardship through loss of employment or a dissolving asset portfolio, forbearance can still be a much better option than just not paying your mortgage. Not paying your mortgage can result in rapidly falling credit scores, mounting late fees, and worst case, foreclosure and seizure of your home. For some, forbearance can alleviate short term pressure on a family’s financial obligations, knowing that once employment resumes, they can “catch up” on payments quickly. If you are experiencing this reality as a consumer, contact your mortgage servicer right away to see what options may exist for you.