You heard anyone affected by Coronavirus is eligible for mortgage forbearance. Maybe you jumped on board or maybe you waited. The media and even your mortgage servicer probably gave vague details about it during the crisis. They acted quickly so everyone could get relief.
Now with things settling, it’s time to learn the truth about it
- You don’t have to make payments during mortgage forbearance.
Mortgage lenders can’t start foreclosure proceedings when you’re in a forbearance agreement. The CARES Act initially set a 3-month forbearance plan. They increased it to up to one year if you need it. Does that mean you should take that option?
It does benefit many people, especially those that lost their jobs because of the pandemic, but it has its downsides.
- You’re only protected if you have a government-backed loan.
What’s a government-backed loan? Any loan that Fannie Mae, Freddie Mac, the FHA, VA, or USDA guarantee is government-backed. Are you not sure who owns your loan? You can call your servicer (the company you make your payments to) or check the following:
If you don’t have a Fannie Mae or Freddie Mac loan, call your loan servicer or check your loan papers to see if you have an FHA, VA, or USDA loan.
If you don’t have a government-backed loan, talk to your private lender. Many lenders have programs too, but their terms may differ.
- The entire amount is due after forbearance.
Forbearance means you stop payments temporarily. When the period ends, you owe the amount you missed. If you skipped 3 payments, that means making up 3 payments at the end of the period.
Fortunately, most government-backed loans have other options rather than requiring a lump sum payment. Chances are since you’ve been out of work you can’t make that lump sum payment.
- You may enter a repayment plan.
Your lender may offer a repayment plan. It’s a short-term plan, typically 6 months or fewer. It divides the amount you owe amongst 6 months or 6 payments. The lender adds that amount to your regular mortgage payment.
For example, your mortgage payment is $1,000. You skipped 3 payments so you owe $3,000. The lender may split that up into 6 payments of $500. For the next 6 months, you’d pay $1,500 rather than $1,000.
- If you can’t afford a repayment plan, you may modify your loan. Your lender may modify your mortgage agreement. They may do this in one of a few ways:
- Lower your interest rate – With a lower interest rate, you’ll have a lower, more affordable payment
- Extend your term – Making your term longer decreases your principal payment, but it means it takes longer to pay your mortgage off in full
- Tack the debt to the back of the loan – The lender may add the 3 months of payments to the end of the loan, extending it as many months as payments you skipped.
- Mortgage forbearance does not hurt your credit.
It feels weird not to make your mortgage payment. But, if you agreed to forbearance, you didn’t do anything wrong. Now, if you just stopped making your payments without an agreement, that’s another story.
If you have a formal agreement, your lender can’t report your payments late to the credit bureaus. This means your credit score won’t fall because of your mortgage payment. If you’re suffering in other areas, though, your credit score may fall.
- You don’t pay extra interest.
You’ll owe the ‘regular’ interest your loan would accrue if you made regular payments, but you won’t pay more. You would pay more interest if you extend your loan or tack the interest onto the end of the loan as that increases your loan balance.
- You still have to pay your taxes and insurance during mortgage forbearance.
Your forbearance agreement only affects your mortgage. It’s an agreement between you and your loan servicer. It does not affect your real estate taxes and homeowner’s insurance.
You must pay your real estate taxes on time. It can be dangerous not to do so. Your taxes could get sold and/or the county could start foreclosure as taxes take 1st lien on your property when they aren’t paid. If you don’t pay your homeowner’s insurance, you risk the insurance company forcing insurance on you.
When the mortgage company chooses the insurance two things to happen:
- The premiums are high (much higher than you’re used to)
- The coverage is lower because it only protects the lender’s interest, not yours
- Future creditors will see the forbearance on your credit
Even though the mortgage forbearance doesn’t affect your credit score, it may show up on your credit report. Anyone that pulls your credit will see it. This may reflect in future creditors’ decisions to lend to you. The jury is still out on how mortgage companies will report it, but for now, we know that it will be on your credit report as unpaid.
- Forbearance is better than defaulting on your mortgage.
Chances are you need the mortgage forbearance because you lost your job because of coronavirus. While the terms seem scary and there are still some unknowns, forbearance is better than defaulting on your loan. Without the forbearance protection, lenders can start foreclosure proceedings after you miss 3 payments.
Mortgage forbearance sounds great, right? It may be for some, especially those that can prove they were affected negatively by COVID-19. But you should know that you can’t refinance if you’re in the middle of forbearance. In today’s low-interest-rate environment, you may want to take advantage of the great low rates. Refinancing may be even more beneficial than forbearance for most, especially since you’d have to pay back the full amount before you could refinance.
Forbearance is a personal decision and one you should discuss with your financial advisor and/or mortgage company. This isn’t all the information available, just some food for thought as you make your financial decision during the pandemic.
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