What is a Forbearance? Should you consider it? When this program was first announced by congress it was very frustrating for me to see all the misinformation that was being promoted by those who weren’t in our industry. It has also been frustrating for me to see the misinformation that is being promoted in the responses from individuals in our industry, as well. You might say – I’m just plain frustrated.
Forbearance is not forgiveness. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, forbearance is an option for homeowners who cannot afford to make their mortgage payments due to the economic impact of COVID-19, the disease caused by the Coronavirus. If you have lost some or all of your income, then the forbearance program with your existing mortgage servicing company might offer temporarily relief. However, as a Mortgage Advisor and individual who lived through the 2008 Mortgage Crisis I have to warn you, it might not be the best option and in my humble opinion should be avoided at any cost, if possible.
Some of the immediate negative implications of a forbearance are:
- Inability to refinance to better rates and terms – once you enter into a forbearance, you forgo the ability to refinance the loan on better rates and terms.
- Issues with meeting the repayment terms – the issues that caused you to enter a forbearance may not go away so you would end up in the same position as you were before the forbearance
- Impact on rates – the added risk to mortgage backed securities will demand a higher yield to justify that risk, and result in a lower value of loan servicing which will have to be reflected in the rates the consumers pay
There may be other risks as well, but these are those that immediately come to mind.
Under a forbearance program, mortgage servicers are not collecting up to 6 monthly payments to allow some financial relief for the time being but the public must understand, the servicers are NOT forgiving or forgetting these payments and they DO expect these payments to be paid in full as quickly as possible and repayment terms may not be any different from existing mortgage terms.
So let’s say your monthly payment is $4,000 , using a forbearance plan you don’t make payments for 6 consecutive months and then here comes the 7th month which now requires you to either request additional assistance or, if you are not eligible for further assistance, you must then repay the skipped payments and currently, there are only the following 3 options available:
John skipped April, May, June, July, August and September for a total of $24,000. Come October 1st John is going to be expected to make a $28,000 payment to cover the last 6 months as well as pay the October payment. It reasonably likely that someone who was unable to pay $4,000 in April would likely not be able to pay $28,000 in a matter of months.
The mortgage servicer will do a quick calculation and offer the homeowner the option to pay the unpaid balance due over the next 6 months. $24,000.00 unpaid balance divided by 6 equaling $4,000.00. The new monthly payment will be $8,000.00 ($4000.00 + $4,000.00) for the next 6 months or if they make it 12 months, you are still to pay $6,000.00 a month.
Loan Modification. This option would require that the homeowner first quality for the program based on its guidelines and also be willing to accept the HUGELY negative impact on his/her credit, as well as possibly lowering his/her FICO score, possibly preventing him/her from future refinance options or purchasing new property for about 2 to 4 years based on current mortgage lending guidelines. Additionally, this could affect other things including lending rates on auto financing, student loans, business loans, credit card applications and essentially anything that relies on credit ratings.
In short, forbearance affects credit. This could impact the ability to refinance or purchase a new home in the future.
Is there an alternative? Depending on what you are looking to accomplish and what your circumstances are, I will make myself available to you to discuss your options. Feel free to call or email me directly and I will be more than glad to discuss whether refinance, debt consolidation, cash-out refi, HELOC or anything else I can offer could be an alternative option for you.