The “F”-Bomb — Forbearance

Should you apply for mortgage forbearance?

Photo by Sasha Freemind on Unsplash

As of April 24, 2020, about 6.4% of all mortgages are in forbearance, and May 1 mortgage payment due date is approaching. As a mortgage loan originator, I get this question pretty often these days, “Should I pay my mortgage?” My answer is always, “You should if you can pay.”

I am a strong advocate of paying your bills on time because it will come back to you, and they do not go away. Just like the amount you owe from the forbearance plan.

We know it by now that the Coronavirus Aid, Relief, and Economic Security (CARES) Act left out lots of implementation details, including the ones for the forbearance program.

This article will discuss the information we have at the moment, while the mortgage industry is still putting the pieces together.

Before we move forward, understand that forbearance options can be different depending on the mortgage servicer and loan type. Always check with your mortgage servicer directly for what applies to you.

What is Forbearance?

Forbearance is a repayment relief agreed between you and the mortgage servicer. It helps to pause the monthly payments for a limited time. The intention is to help when you are experiencing financial difficulty and cannot make your payments temporarily. This is a better option than skipping them without notice and going into default.

Prior to the CARES Act, lenders used to require proof of hardship. However, the new federal law included the following points to protect homeowners with federally backed mortgages (FHA, VA, USDA, Fannie Mae, and Freddie Mac):

You may request forbearance for up to 180 days with an option to extend for another 180 days.

There are no additional fees, penalties, or additional interest (beyond the scheduled amounts).

You only have to claim you have a “pandemic-related financial hardship”, and you do not have to submit additional documentation to qualify.

Here comes the problem. While it sounds like free money, it really is not. There are three things you should consider before applying for forbearance.

#1. Repayment

I want to stress that forbearance is not deferment. You have to pay it back when the forbearance period is over. Your payments are not forgiven or erased; your regular interest will still accrue.

These are some common repayment methods:

A lump sum payment at the end of the forbearance period

The outstanding amount gets added to your existing monthly payments

The outstanding amount gets added to the end of your loan as an additional or lump sum payment

Loan modification — change in the interest rate and loan terms to lower the original payment

Be sure to ask your mortgage servicer these three questions during the application:

Will you owe the entire unpaid amount in a lump sum once the forbearance period is over or at the end of the loan term? Can you extend your loan term and add the missed payments to the end of the mortgage? Will your subsequent monthly payments increase?

Once you have the answers, evaluate if you can manage the repayment(s) before proceeding with the forbearance option.

#2. It may affect your future lending power

The CARES Act suspended the reporting of COVID-19 related mortgage forbearance to the credit bureaus. Meaning, your credit scores will not be affected if your forbearance application is approved by the mortgage servicer.

However, if you are planning on applying for a new mortgage (refinance or purchase) soon, this may affect you. The credit report allows lenders to see the breakdown of payments made in the past months for each tradeline (credit account). Lenders will know if you skip a payment.

A lot of lenders have already added new requirements that they will not fund new loans to borrowers in forbearance. It will be a better option to dip into your savings.

#3. Do the right thing

The forbearance program is the last resort for borrowers who really cannot afford their payments before getting into default. There are so many families that are truly suffering but cannot get the help they need. Also, the mortgage industry is already having liquidity and capacity issues.

Many mortgage servicers do not own the mortgages and still have the obligation to pay their investors (the owners of the mortgages), even if you don’t. Normally, mortgage services can tolerate a small amount of forbearance, and the period used to be much shorter — up to three months. But we are now talking about an unprecedented volume of forbearance which can last for up to a year.

Even the Department of Housing and Urban Development (HUD) and Federal Housing Finance Agency (FHFA) are offering assistant programs to the federally backed mortgages (FHA, VA, USDA, Fannie Mae, and Freddie Mac loans), some assistant programs come with a hefty price tag. Not to mention the non-federally backed mortgages.

Why do you care as a borrower? Because someone has to pay the bill. One thing lenders can do to protect themselves is to incorporate the risk into the interest rate and fees. In another word, the next person getting a mortgage will take the hit and get higher pricing to compensate for that. So, at the end of the day, the consumers will have to bear some costs.

Another possibility if this situation drags longer without additional aids from the government, this could collapse the mortgage industry and subsequently lead to another housing crisis.

So, if you can make your payment, make your payment to help the economy and keep it going.