As states and cities issue stay-at-home orders and businesses are forced to shut down due to the current pandemic crisis, more and more people are financially impacted. Homeowners are among those affected by job loss and economic slowdown. If you are one of the homeowners affected, you are probably looking for help with your mortgage payments in your quest to cut as many expenses as you can.
Many mortgage servicers are offering help, and you probably came across different mortgage relief offers, which might have names like mortgage deferment, loan assistance, mortgage suspension, mortgage forbearance, etc. Unfortunately, these terms often get mixed up or are used interchangeably, so it is best to get the specifics about your mortgage relief options to make sure you can make the best decision.
The Basics of Forbearance
Generally, this is how these mortgage relief programs work:
What does forbearance mean?
Forbearance means you do not have to make a mortgage payment or be eligible to make smaller payments for a period of time (usually between 3 to 6 months)
Should you request a forbearance?
DO NOT REQUEST FOREBEARANCE UNLESS IT IS YOUR LAST OPTION!!
You should only request forbearance if you are experiencing financial hardship and you have no other options. You should still pay as much as possible, each month, for as long as possible.
Will forbearance impact your credit?
According to CARES Act, forbearance is not supposed to hurt your credit. However, there is no guarantee that this is still the case after the forbearance period ends. For example, if you are not able to meet your lender’s requirements at the end of the forbearance period, they could take action to hurt your credit. Also, a forbearance alone could be enough to prevent you from getting a new home loan or refinance in the future.
Do you have to pay a fee?
Ask your mortgage servicer for the specific. For now, many lenders are waving fees.
Will you be subject to foreclosure?
The lender will not foreclose while your are in forbearance. However, if you cannot meet your lender’s requirements at the end, they could very well take action to foreclose.
Are the skipped or reduced payments forgiven?
NO! They will want their money back. The very best case scenario is the unpaid amount is tacked on the end of the loan term with some extra interest.
What happens to the payments you missed?
The answer depends on the mortgage servicer, but you generally have access to the following options:
- Continuation – The servicer agrees to continue forbearance for X additional months.
- Reinstatement – At the end of the forbearance period all of the past payments are due in addition to the current payment
- Repayment Plan – The lender temporarily increases your next X payments so that you can catch back up. For example, if your mortgage is $2,000 a month and you missed three months, you owe $6,000. The lender may ask you to pay $2,500 a month for the next 12 months so that you can get caught up on the loan.
- Deferment – The missed payments are added to the balance of the existing mortgage. This is usually the best option since it is unlikely for the first two options to work for most people who recently experienced financial hardship.
- Modification – Due to financial hardship, the borrower has to work with their loan servicer to modify the terms of their existing mortgage.
Will forbearance on an existing mortgage negatively impact your ability to refinance or purchase a home in the future?
Generally, YES. Some servicers and lenders have already stated that they will not accept borrowers that had previously been in forbearance.
Here are the factors to consider when you seek a mortgage forbearance.
- How long is the forbearance period? For example, one month, three months, or some other length of time.
- Do you pay nothing or a reduced amount during the period?
- What happens at the end of the period?
- What are the costs and fees associated with the forbearance?
- How does this impact your credit?
Since the terms are easily confused, and there is no standard way to deal with the current situation, it is best to talk to your lender and get the specifics before you make your decision. Also, make sure you have a strategy to deal with what happens at the end of the forbearance period. Whatever you do, do not simply stop paying and just hope that the problem will go away.
What Can Go Wrong?
Although your credit might be protected now, forbearance could cause a major problem when it ends. It is very possible that you cannot meet the lender’s requirements, and in order to save your home, you have to show financial hardship. Showing financial hardship could mean sharing your finances, being forced to liquidate your other assets, or having to be delinquent on your mortgage (which will ruin your credit).
If things go really badly, you could lose your home to foreclosure. If you could save your home, it might mean ruined credit which takes 5-7 years to fix.
Remember that forbearance is not the only option. Here are some options you could consider:
- You can talk to your lender about home equity loan, loan modification or refinancing if you’re still in the position to do so. This could free up enough cash to see you through the next several months in exchange for a bigger debt.
- You can withdraw money from your investment accounts, e.g., brokerage account or retirement account, to save your home and your credit. Currently, CARES Act allows you to withdraw up to $100k from your retirement account without the 10% early withdrawal penalty and you can spread the income taxes across 3 years.
- If you have a large 401(k) account, you could borrow up to $100k from your plan.
- You could also put your house for sale to unlock the equity and find a less expensive to live until things improve.
- Do not simply stop making your mortgage payments.
- Explore all the alternatives before choosing forbearance.
- Consult with your lender about options that are available to you.
- Ask the “important questions” to fully understand the offer.
- Make sure you have a strategy to deal with the outcome when the deferment/forbearance period ends.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.