The Truth About Mortgage Forbearance

I want to preface this by saying I am the first person to be bothered by people telling other people how to spend their money – however, the information below can drastically effect your financial future and I want you to have all the facts!

Due to the current state of affairs in our country and what is going on with COVID-19, our country is seeing different levels of lock down, furloughed workers and businesses closing down, leaving many people out of work and in turn – potentially in financial distress. Sometimes, that rainy day fund isn’t always an option but please be weary of the red tape that surrounds some of these programs that on the surface, seem like they’ll be the answer to all of your financial stresses.

A home tax deduction concept illustrating rental incomeMortgage companies are advertising what they believe is a way to help you through these hard times and many are offering “forbearance” programs, but they’re not giving you all the details – What looks like a saving grace could actually be very detrimental to your financial future.

What exactly is forbearance?

Forbearance is where you’re given permission to delay making mortgage payments, without a direct effect on your credit score within that specific period of time.

“Forbearance is not forgiveness. You still owe the money that you were paying, it’s just that there’s a temporary pause on making your monthly payments.” – Karan Kaul, a research associate at the Urban Institute

How does forbearance work?

person-using-macbook-374720With a typical forbearance agreement, a borrower can pause payments entirely or make reduced payments on their mortgage. Those with federally-backed mortgages (FreddieMac, FannieMae, FHA, VA and USDA) are eligible for up to 6 months of forbearance initially based on the CARES Act. Once that 6 month period is over, if they’re still facing financial hardship, an extension of up to another 6 months of forbearance can be requested.

Here’s the kicker – At the end of your 6 month forbearance period, guess what? The entire balance of those 6 months worth of mortgage payments that you needed relief from is due DAY ONE (including your taxes and insurance, otherwise your escrow balance will be short when the time comes for those pay outs) – AND chances are, you’re also still accruing interest over those 6 months.

man-wearing-black-and-white-stripe-shirt-looking-at-white-212286Please be advised: Forbearance is not the same as deferment. When you defer something like your student loans, the loan is extended the amount of time that you are not paying on the loan. This is not the same!

What they’re saving VS what it means

  1. No reporting to credit bureaus” – True, during the actual forbearance, the missed payments will not be reported as missed, however if they are not paid as the balloon payment required at the end of the given time period, it will be reported. It is also worth noting that if you cannot pay this balloon payment, you could be put on some sort of re-payment plan and that will be reflected on your credit.
  2. “No foreclosures” – True, unless you cannot afford the payment at the end and re-payment plans are not an option, then the reality of foreclosure can get very real, very quick – as you’ll then be 6 months behind on your mortgage.
  3. “It won’t effect my future buying power” – False, many lenders are saying that should you utilize one of these forbearance programs, your chances of being approved for a new mortgage in the near future could be effected. We recommend you reach out to a trusted mortgage company to get more clarification on your personal situation. If you need recommendations, I would be happy to help.

The Bottom Line

questions-answers-signage-208494For some, forbearance may absolutely be an option and it may work for your situation, so don’t let this information make you feel that what you’re doing is “wrong.” What we’re trying to accomplish is making sure everyone is fully informed of the truth in the fine print and that for a large majority of mortgage holders, this is likely not your best option in the long run – This should be used as a last resort.

If you have more questions on this, I have a handful of very helpful lenders that can help answer, or find answers for you. Please reach out – We are passionate about making sure we have the most educated clients when it comes to your home, your mortgage and your future.