Whether you’ve lost your job, are worried you might be about to, or are finding your finances crunched by the coronavirus pandemic, you may be thinking about asking for a forbearance on your mortgage. But should you? Will it really help put you in a better financial position?
We’re breaking down the details.
What is a forbearance?
“Forbearance is a temporary postponement of mortgage payments,” said Investopedia. “It is a form of repayment relief granted by the lender or creditor in lieu of forcing a property into foreclosure.”
The key words here are “temporary” and “postponement.” Forbearance is a way to delay your mortgage payments for a period of time with the knowledge and permission of your lender. That way, you can skip a number of payments without putting your home at risk like you would if you just stopped paying; eventually, your home would go into foreclosure.
The CARES Act, otherwise known as the coronavirus relief package, has stipulated that “mortgage borrowers with federally backed loans can seek forbearance for up to six months,” said Forbes.
You can also ask for an additional extension for up to six months if needed. “You must contact your loan servicer to request this forbearance,” said the Consumer Finance Protection Bureau. “You do not need to submit additional documentation to qualify other than your claim to have a pandemic-related financial hardship.”
Here are a few more things to consider.
Those skipped payments aren’t freebies
Some homeowners have been disappointed to find out that forbearance doesn’t mean forgiveness. You’re not excused from making those payments; you’re just not making them NOW.
“One of the most important things to remember, and the source of a lot of confusion, is that forbearance is not forgiveness,” said Karan Kaul, a research associate in the Housing Finance Policy Center at the Urban Institute, on CNBC. “It’s just putting a pause on your mortgage payments for a few months. And depending on the loan servicer, interest can continue to accrue during the forbearance period, which may increase the overall cost of the mortgage.”
In addition, homeowners are “still going to be paying interest on the balance of their loan, there are taxes and insurance that are not into escrow, that will have to be paid out,” said Jennifer Micklos, with Movement Mortgage out of Clermont, NY on WFTV.
Those skipped payments will likely be due sooner than you think
There has been some talk about mortgage payments being tacked on to the end of the loan term, which would be more of a mortgage holiday for those who are having a hard time paying. But, by and large, this is not what lenders are offering.
“When Morgan Davis, a furloughed clothing designer, called Wells Fargo to ask for help with her FHA loan about two weeks ago, she was offered to suspend three payments without penalty – three months of forbearance,” said Forbes. “But at the end of those three months, all my mortgage payments would be due at once,” Davis said. “I told [the bank representative] that didn’t sound very helpful. I explained I had only called to see if there was a way for me to hold onto more of my cash while I wasn’t getting paid.”
Flagstar Bank’s forbearance program has similar stipulations, although they initially offer a six-month suspension period. The forbearance letter they are sending out to customers states, that “A forbearance plan is a temporary solution, and the suspension of your payments during the Forbearance Period will make your loans past due.”
Borrowers are expected to bring their loan current at the end of the six months by “paying all past due amounts (including those not paid during the Forbearance Period);” setting up a repayment plan that “adds a portion of your past due amounts to your regular monthly payment until your account is current;” or applying for a “more permanent loss mitigation solution.”
You won’t be reported as late
“Lenders are not to report forborne payments to the credit bureaus, which means that borrowers who request forbearance will not see their credit scores suffer,” said Forbes. “However, if they do not contact their loan servicer to start a forbearance plan and miss a payment, the lender is to report that lapse to the credit bureaus.”
Additionally, “Loan servicers are barred from adding any fees, penalties or interest charges beyond the amounts scheduled or would be calculated if the borrower made timely payments,” said CNBC.
You might not be able to get through to your lender
CNBC reported that homeowners have spent hours on the phone waiting for help from their lender, so be patient if you’re making that call. Or, check out your bank or lender’s website to see if they have added forbearance information. You might find what you need and be able to submit your request without having to speak to someone.