April 15, 2020
In the last couple of weeks, there has been a lot of news coverage around mortgage forbearance. For many people who have lost their jobs or watch their earnings plunge to almost $0, this seems like an attractive option. Before you decide that mortgage forbearance is the right path forward for you, it is important to understand what is a mortgage forbearance and what are some of the consequences of choosing this option.
First and foremost, what is Mortgage Forbearance?
Forbearance is a TEMPORARY postponement of mortgage payments. It is a form of repayment relief granted by a lender/bank in lieu of forcing a property into foreclosure. It provides an opportunity for a borrower to postpone some mortgage payments during these challenging times and is ultimately cheaper than foreclosing on that borrower’s home.
Forbearance DOES NOT forgive your mortgage payments. It is DELAYING all or a portion of your payments, and the delayed amount will be due back to your lender/bank eventually. Under forbearance, you do not have to make your full monthly mortgage payment. This could mean a few things:
- It may be that you don’t have to pay any part of your mortgage; OR
- It may be that you only have to pay a fraction of your normal monthly payment to either cover your escrows (taxes or homeowners insurance), or mortgage insurance, or interest.
Forbearance Terms differ on a case-by-case basis. Forbearance periods can be as long as 12 months, but is dependent on what your lender/bank is offering. They can re-structure your mortgage loan in multiple ways to collect missed mortgage payments. The most common ways are:
(1) Require all missed payments to be paid at the end of the forbearance period in one lump sum;
(2) Amortize all missed payments to be paid over the ensuing 12 month period after the forbearance period;
(3) Extend your overall mortgage term, and move the forbearance months to the end of the original loan term.
Specific forbearance terms are negotiated on a case-by-case basis between YOU (the borrower) and your lender/bank.
Will forbearance (or any other type of loan modification) hurt your credit? That depends. Call your lender/bank to understand what options are available to you. Be sure to inquire about the impact on your credit score and get any agreement in email/on paper. Paper documentation of a loan modification can be very important to hang onto, especially if there is a mis-communication somewhere along the way.
In Summary, everyone's circumstances is different and you need to decide what is the best option for you by calling your lender/bank. Keep all records and communications and know that forbearance may not be the right choice for you.
To quote Rocke Andrews, Lending Arizona mortgage broker and president of the National Association of Mortgage Brokers,
"Don't take forbearance if you don’t absolutely need it. It all becomes due, and who knows what happens between now and then,”