Forbearance
It's likely that, now more than ever before, you're hearing the word FORBEARANCE, and if so, you're likely seeing a lot of conflicting information -- on social media, on TV and in print news, and via word of mouth. There is a lot of misinformation out there about what you should do if you are having trouble paying your mortgage and what forbearance actually entails. While the best person to call for details about your specific mortgage is your trusted lender or your mortgage servicer, I want to try to clear up some of the misinformation and misperceptions for you...and give you some resources, as well.
The Consumer Financial Protection Bureau (or CFPB) is providing valuable information that you should review prior to considering whether forbearance is an option for you. Click here to review that information.
FIRST, WHAT IS FORBEARANCE?
Forbearance is a method of loss mitigation. It is a way for the mortgage servicer to work with the borrower (the homeowner who has a mortgage on their home) to help that borrower to stay in their home when making payments becomes difficult. Congress has address mortgage forbearance as part of the CARES Act, to try to help homeowners who are struggling to meet the financial rigors of "normal" life while we are in these very abnormal times.
The CARES Act allows for most borrowers to request a forbearance for up to 180 days, which may be extended (under certain circumstances) for an additional 180 days (the CARES Act states that eligible borrowers need only request the additional 180-day extension, but you need to check with your lender to see if your loan is a federally-backed loan (specifically, Fannie Mae, Freddie Mac, FHA, VA, USDA). Under the CARES Act, borrowers simply have to request the forbearance and affirm they are having a hardship related to COVID-19 -- no documentation is required, just the borrower's word. The act covers all of the above-mentioned federally-backed agency loans, but some private-backed lenders are also participating at some level -- you should call your current mortgage servicer to find out specific information for your property, your loan, and your circumstances.
Need to know who owns your loan? You likely know if you got a VA, FHA, or USDA loan, but you may not know if Fannie Mae or Freddie Mac owns your loan. Here's a great resource for you: https://www.makinghomeaffordable.gov/get-answers/Pages/get-answers-find-out-mortgage.aspx
It is important to understand that a forbearance does not erase or waive the amount owed in any way. Payments are delayed and will have to be made -- in some way -- at the end of the forbearance period (unless the borrower applies for and is approved for another option, which presently carries no guarantee of approval -- see below for more information and definitions).
Under the CARES Act, borrowers who are approved for forbearance cannot be charged late fees or penalties, but the important word there is approved. The borrower should keep making payments until the forbearance is approved.
At the end of the forbearance period, it is very important that the borrower have a conversation with the mortgage servicer, review which options are available, and exit the forbearance properly.
First, as I said, the best person for you to call if you are having trouble paying your mortgage is your trusted lender and/or your mortgage servicer. However, be advised that you should have a list of questions to ask your servicer, as you want to make sure you are getting all of the information before you make this decision.
Some of the questions you should ask your mortgage servicer are:
- What options do I have to avoid forbearance? For example, is a cash-out refinance an option for me?
- What kinds of forbearance are options for me? Do you offer deferment or a repayment plan, or is it strictly reinstatement? (For definitions of the types of forbearance that might be available to you, please see below.)
- How will this be reported to the credit bureaus? (See below for more on this.)
- Under the CARES Act, under what circumstances can my request for forbearance be denied? (The only answer here should be if your loan is not one that is described above.)
- If I apply for forbearance and I am denied (i.e., if you have a privately-backed loan and not one of the ones described above), how will this affect me (if at all)?
TYPES OF FORBEARANCE
Your mortgage servicer may offer one or more of the following forbearance options to you (and then see below for further illustration of some of these options):
- Reinstatement – repay all missed payments at the end of the forbearance period, i.e. if miss 3 payments, then make 4 total payments at month 4. Note that under the CARES Act, if you have one of the federally-backed agency loans, you may not be required to make the lump-sum payment. The CFPB covers repayment details for each of the different types of loans, here: https://www.consumerfinance.gov/about-us/blog/guide-coronavirus-mortgage-relief-options/
- Repayment Plan – divide the missed payments out over 3-12 months and repay on a schedule (if miss 3 payments, divide 3 payments by 12, and add this amount to each new payment for 12 months)
- Deferment – missed payments would be added to the very end of the loan and paid as a non-interest bearing lump sum without the loan term extended (still awaiting clarification from Fannie Mae and Freddie Mac on how this option will work and if it will be available)
- Modification - more time-consuming, much more complex solution where loan terms are permanently changed
WHAT DO EACH OF THESE TYPES OF FORBEARANCE LOOK LIKE, FINANCIALLY?
(NOTE: with a federally-backed agency loan, these scenarios likely won't apply to you, but please be sure when talking to your mortgage servicer.)
Let's take a look at some possible financial scenarios for a hypothetical forbearance:
1. Reinstatement. You have a $2,500 per month mortgage payment, and you apply for and are granted 180 days (6 months) of forbearance. At the end of the 180-day period, the mortgage servicer lets the borrower know that their forbearance will come due in the 7th month. What does that look like? For months 1-6 after approval of the forbearance request, the borrower does not make mortgage payments; however, at the 7th month, the borrower will owe the regular mortgage payment PLUS the 6 months' worth of mortgage payments for which the borrower had forbearance, paid in a lump sum (may also be called a balloon payment). Take a look at this scenario, below.
2. Repayment Plan. It's possible that, at the end of the above scenario, the borrower may go to the mortgage servicer and say, I don't have $17,500 in a lump sum to make this large payment now. Perhaps the servicer allows for an additional 180 days of forbearance (but then the lump sum payment due in month 13 will be $32,500!), or perhaps the servicer says, "How about a payment plan?" The borrower agrees that a repayment plan will work better for them, so they enter into an agreement for repayment over the next 12 months. The $15,000 from the 6-month forbearance time period is divided by 12, which comes out to $1,250 per month. This is added to the regular monthly mortgage payment of $2,500 per month, meaning that the new monthly mortgage payment amount, for the next 12 months (starting on month 7) is $3,750 per month. Consider seriously whether this option will work for you before entering into a repayment agreement with your servicer! See below for an illustration.
3. Deferment. It might be that your mortgage servicer offers deferment as an option, though it is not as likely as the two options above. Deferment simply means that the missed payments will be tacked on to the end of your mortgage. Meaning, if you are granted a 6-month forbearance with deferment, at month 360 (if you have a 30-year mortgage and you stay in your home for all 30 years), you will have an additional 6 months of mortgage. When else might that $15,000 -- those 6 months of payments for which you were granted forbearance -- come due? If you refinance, that $15,000 will be due in full at that time, or if you sell the property, the $15,000 will be owed to the mortgage company as part of your total principle due. Simply put, the "missed (with permission)" payments are just tacked on to the end of your mortgage, at whatever point that ending comes. (Under the CARES Act, the federally-backed agency loans are all offering some degree of deferment -- however, please review the terms carefully and be sure that you understand exactly what you're agreeing to, up front.)
4. Loan Modification. There is no one way to illustrate loan modification. It is a complex process that can involve the allowance of missed (to be paid later) payments, along with a modification of the interest rate and other terms.
HOW WILL FORBEARANCE AFFECT MY CREDIT?
Take any advice or information on forbearance credit reporting with a grain of salt. Under normal circumstances, different types of forbearance can affect your credit in different ways. Since forbearance is being offered as part of the CARES Act, some sources are reporting that, as long as the forbearance is entered into and exited properly, then the mortgage servicer will not report anything negative on the borrower’s credit report. However, the lack of credit reporting during the forbearance period could have a negative impact on a credit report or score -- since this is all new to us (since the CARES Act is new and a direct result of and response to COVID-19), we really have no way to know for sure, except to take the government's and your servicer's word for it -- so take it with a grain of salt.
HOW ELSE CAN FORBEARANCE AFFECT ME?
Forbearance can affect your ability sell your home. If your mortgage is in forbearance, you need to alert your REALTOR® and the closing attorney prior to listing the home so that they can correctly assist you during the process.
Forbearance can affect your ability to buy a new home. In addition to possibly negatively impacting your credit, forbearance may then force you into a waiting period before you are allowed to obtain a new mortgage in the future.
Forbearance can affect your ability to refinance. You cannot refinance while in forbearance, so explore all other options before accepting forbearance as a last resort.
REMEMBER, we are not mortgage lenders or mortgage servicers -- the best person for you to call if you think you need to explore forbearance or other avenues if you are having trouble paying your mortgage is your trusted mortgage lender or your current mortgage servicer.
