Mortgage Forbearance: What You Need to Know
If you’ve been paying any attention to the news lately during COVID-19, you’ve probably heard a lot of talk about “forbearance” or “deferment”, specifically mortgage forbearance.
Today, we want to talk about what mortgage forbearance is and isn’t, alternative options available, and what you can do to protect yourself if you need to apply for mortgage forbearance.
What Forbearance Is (and Isn’t)
Forbearance is an agreement between a borrower (a homeowner) and their bank (or loan servicer) that allows a borrower to make a reduced payment, or no payment at all, during a temporary hardship such as a recent unemployment or medical emergency.
Forbearance is not loan forgiveness or stimulus money.
You’ll still need to pay what you owe. Therefore, in our professional opinion, if you can keep making your payments we strongly advise you to do so.
Risks of Mortgage Forbearance
We don’t believe you should take a forbearance just to take it, but we understand you may need to. If there’s any way that you can keep making your payments, we encourage you to do so. Continuing to make payments is truly in your best interest.
There are a couple of reasons why we advise against taking a mortgage forbearance:
- The repayment plan may not be fully explained to you prior to your agreement with your lender. That means you could end up with a much larger bill than you planned.
For example: if your loan repayment agreement is a balloon payment and you put your loan in forbearance for 6 months, that means on month 7 you’ll owe not only the payment for month 7, but also the 6 prior months worth of payments.
- If you currently have a mortgage and plan to sell your home and get a new one, or refinance your current mortgage, lenders require 12 consecutive months of on-time mortgage payments. That means if your current mortgage is reporting on your credit in forbearance, you will not be able to qualify for a new mortgage.
Alternatives to Forbearance
The main alternatives to taking advantage of a mortgage forbearance are utilizing any money you have already in savings, including a 401(k) or IRA, or borrowing against those savings. That money is money that you already have, and it’s better in the long run to use it rather than have forbearance on your credit report.
Again, we understand there are going to be many of us that have to take advantage of forbearance and it will be a welcome relief during this season. If a mortgage forbearance is a good (or only) option for you, you’ll need to know how to protect yourself.
How To Protect Yourself If You Need Mortgage Forbearance
- Call your lender to request forbearance and get all of the terms from your bank in writing.
- Read the fine print and the terms of the payback. Make sure you completely understand those terms. If you have any questions, reach out to your lender. It’s much better to ask questions than be surprised with an unexpected bill.
Remember forbearance isn’t forgiveness.
- Monitor your credit report and score to make sure your forbearance was reported to the creditors correctly. It should not be reporting negatively.
Here’s an article from the Consumer Financial Protection Bureau about protecting your credit during the coronavirus pandemic.
We know these are unprecedented times. If you have questions about forbearance and are wondering if it’s right for you, give us a call or contact us below.
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