What is a mortgage forbearance and should I get one?

As the corona virus continues to impact employment and income around our region and country there are millions of homeowners who have reached out to their mortgage servicing company to inquire about a forbearance. The challenge is that a forbearance isn’t foolproof and while it provides initial and current relief from mortgage payments it may have negative consequences the borrower isn’t aware of.

Over the past couple weeks we've had a couple previous clients reach out to us with questions about forbearance, how it works and what they should be aware of so we thought it a good time to do a post regarding them.

The CARES Act package requires mortgage servicers to provide borrowers with a federally backed mortgage a forbearance option - a temporary postponement of mortgage payments. Federally backed mortgages are those that are either insured by Fannie Mae, Freddie Mac, FHA or VA. Those people with other mortgages may also be able to receive forbearance at the discretion of their servicing company.

So what does a forbearance mean and can I get out of making my mortgage payments? The quick answer to that is “NO”. A forbearance is not loan forgiveness and all borrowers who opt for one will have to pay off their loan and the payment arrears if they do receive one. Essentially you are pausing your monthly payments for a temporary amount of time and agreeing to pay them later in some way.

Under a forbearance agreement, a borrower can pause payments entirely or make reduced payments on their mortgage. Homeowners with federally-backed mortgages are eligible for up to 180 days of forbearance initially under the CARES Act. At that point, if they’re still facing financial difficulty, they can request an extension of up to another 180 days of forbearance.

The details in the CARES act provide that during the forbearance period, mortgage servicers cannot make negative reports about the borrower in question to credit bureaus. However it has not yet been determined how that will be done and the three credit bureaus have already noted that they have no system in place if a creditor was to report a borrower in forbearance as anything different than a late payment. It’s highly likely that there are going to be borrowers whose credit ends up with lates or reduced scores by creditors reporting inaccurate information to the bureaus.

In order to be granted a forbearance the mortgage servicer will go through a number of questions over the phone with you and may ask for documentation of your financial hardship. Do not expect the process to be quick and easy and it will vary from servicer to servicer.

The key thing with any person considering forbearance is to get the details in writing of it before agreeing to it. Having the details in writing will prevent any confusion in the future plus protect you if there are errors on your mortgage statement on credit report.

The big thing to watch out for with any forbearance plan is Balloon Payments. In the past most forbearance plans by servicers were designed with a balloon payment of the arrears (past due amount) being due in one lump sum at the end of the forbearance. Imagine a homeowner with reduced income coming out of forbearance and having to pay 6 months of payments all at one time! Most wouldn’t be able to do it and they’d be on the road to foreclosure. Servicers may offer a balloon payment option but its’s the last thing that any borrower would want to accept.

A better option would be for the arrears to be added into the monthly payments over time thereby increasing the mortgage payment a reasonable amount that the borrower could make. The best option, which not all servicers offer, is for the arrears to be added on to the end of the loan in additional payments thereby extending the life/term of the loan.

Unlike forbearance, a loan modification involves a permanent change to the details of the mortgage. This can include changing the interest rate, extending the length of the loan or deferring the amount owed until the end of the loan as a separate loan amount. Any borrower choosing to do a forbearance needs to plan ahead for the end of the forbearance period and inquire with the servicer if a modification will be an option or not.

It’s a challenging time for some homeowners and finding both the right information and guidance on how to approach these elements. One thing we have in the past and will continue to tell clients and friends that mortgage lates and the possibility of a foreclosure is the last thing you want on a credit report as it’s the most damaging and a foreclosure could mean many years before owning a house again.

You can have all numerous late payments on other credit accounts, utility bills or other non-credit reporting payments and still be able to get a mortgage unlike negative mortgage credit history. So when someone is facing the possibility of not having enough money to make their monthly payments it is vital to look at the impact non-payment of each would have both in the short and the long term. While a forbearance may be the only option for some, it may not be a better choice than using stopping payment on other accounts.

Each individual situation is different and unique so if you or anyone you know has questions related to forbearance, credit impact of non-payment or other elements related to their home and mortgage please don’t hesitate to ask for our input.