Should You Take a Forbearance?

There is a lot of talk about the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the different ways in which it can help homeowners.  You’ve probably heard about mortgage companies offering a Forbearance, or a pause button on paying your mortgage.  Before you take this option, it is important to dive into what, exactly, it is, and how it will affect you in the long term.  I spoke to a mortgage advisor to get some unbiased thoughts and wanted to share them. Forbearance is not forgiveness. Under the CARES Act, a 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 temporary relief.  According to my advisor, it might not be the best option and should be avoided, if at all possible.  Some of the immediate negative implications of 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

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.  Many banks are requiring balloon payments (full repayment of missed months) at the end of those months, rather than tacking it onto the end of the loan. 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 $18,000 in skipped payments. Currently, there are only the following 3 options available: Option 1 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 is 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.  Option 2 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. Option 3 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 a 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. If there is any way you can pay your mortgage, it is in your best interest to do so. If you do need to speak with a lender about your specific situation, I’d be happy to put you in touch with some of the great ones I work with.