Forbearance and Your Mortgage: Why You Should Maybe Reconsider
Due to the COVID-19 Pandemic, mortgage forbearance has been front of mind for many homeowners. For those individuals that have recently experienced job loss, or loss of income due to the COVID-19 Pandemic, loan companies are now offering mortgage forbearance.
Forbearance, an agreement with your mortgage company that allows you to reduce or delay payments for a set period of time, it is a possible remedy for homeowners unable to cover the costs because of the COVID-19 Pandemic — This is not mortgage forgiveness. If you have been financially impacted by the pandemic, should you consider this option?
With millions of American’s experiencing financial hardship because of the outbreak, the requests for mortgage forbearance has seen skyrocketing numbers. In the final weeks of March, there was a 1,896% increase in those requests, with the total number of loans in forbearance growing from 0.25% to 2.66% from March 2 to April 1, 2020, according to the Mortgage Bankers Association.
CARES Act: What is it?
The recently passed Coronavirus Aid, Relief, and Economic Security act, or CARES act, allows impacted homeowners with federally backed loans to delay paying their mortgage. Sounds ideal, right? But this option is something to be weighed heavily. While this mortgage break option is to assist in the interim while American’s get back on their feet financially, banks will still expect payments at some point — most mortgage servicers are requiring a lump sum at the end of forbearance.
So is the relief worth it?
In our opinion this should be considered the absolute last option when weighing which bills to pay.
Mortgage companies can require homeowners to pay the deferred portion in one lump sum. With that being said, there are other possible options, but no guarantees.
In some cases, you may be able to negotiate with your mortgage servicer to pay extra each month until the deferred amount is repaid or add the suspended payments to the end of the loan. Another option is to apply for a loan modification, in which the loan company might add the deferred amount to the balance.
Another topic to consider is this: are you looking to purchase a new home or refinance your existing mortgage? If you decide to pursue mortgage forbearance on your current or co-signed loan, the challenges that will follow in pursuing a new home loan may outweigh the “in the now” benefits of forbearance. In order to qualify for a new loan in the future, the forbearance must be removed completely and all payments must be current. You must then wait for this to reflect on credit that the mortgage is no longer in forbearance. Without pursuing those steps, you will not qualify for a new loan regardless of perfect credit history. When all is said and done, while your credit score might stay intact, current guidelines stipulate that an underwriter must verify the previous mortgage payment history. Without a change to guidelines you potentially might not be able to obtain a mortgage for 2 – 4 years.
With such great risk of a 3-month payment being required at once, some American’s may be faced with a difficult decision. There are situations in which mortgage forbearance is a valuable avenue to pursue, especially for American’s that have lost their jobs and incomes due to these trying times. This is why this is put in place, and an option for individuals facing extreme hardships due to the COVID-19 Pandemic.
When making the choice if this is the best financial decision for you and your family, bear in mind that this is not a forgiveness of debt, or free money. If mortgage forbearance is something you deem necessary due to your current financial situation, it is also important to note that when the forbearance concludes, it may financially impact you with higher payments. Re-payment will be mandated by all lending companies, and it is important to have a discussion with your servicer if this is the route you deem best for your financial situation.