Is Mortgage Forbearance Right for You?
Our world has been turned upside down in a matter of weeks. For some, it was a matter of days. Now, we all sit at home and wait. And some worry that this is 2008 all over again. This isn’t. This isn’t a financial market meltdown. This is a virus; a virus that has forced us all to hunker down and work from home. The government has forced us all home to slow the spread of the virus. And as a result, they proactively put plans in place to help us through what they knew would be a hard time.
We have already seen unemployment claims jump to 10 MILLION claims in just two weeks. For those that are no longer able to work and have either been placed on furlough or have been laid off, the government was proactive in putting plans in place to help us through it, as much as possible. They have put a two trillion-dollar stimulus plan in place to help businesses and individuals weather this storm. And one piece of that plan is to allow homeowners to offset their mortgage payments by up to three months, using mortgage forbearance.
Here is the issue. The media has made a blanket statement about this without getting into the details. Some have interpreted “forbearance” to mean the payments can be skipped. Others have interpreted this to mean the payments are forgiven. And it’s assumed that all banks and mortgage servicing companies are all taking the same approach. None of these are the case. The government has a specific plan in place for government sponsored loans, but not all loans are sponsored by the government. And not everyone needs to use the programs. This should only be done out of necessity. Don’t kick your debt down the road unnecessarily. Keep the programs available for those who truly need it.
Before you take advantage of the forbearance programs, let’s break down what is actually going on to ensure you don’t have a negative impact as a result of what was perceived versus what is the reality of forbearance.
Forbearance is not Forgiveness. It’s important you understand the difference. Mortgage companies are not forgiving payments. This is not free money. Forbearance means that the payment, and the interest is simply being postponed to a later date. The interest will be collected and your payments will be due in the future. The problem with this is, to date, I have not heard of specific guidelines as to when or how the postponed payments will be collected. Will the payments simply be added onto the loan balance and extend the term of the loan by the unpaid months? Or will they collect the payments as a lump sum after the 3 months pass? We don’t know. There is no single plan in place. This will be specific to each individual mortgage servicer. Don’t make assumptions here. If you plan to utilize the forbearance program, make sure you speak to your mortgage servicing company and specifically ask when the repayment of the postponed payments will be.
Why is this so important? Let’s play out a scenario. Your mortgage payment is $3,000 per month and you are currently on furlough. You set up your forbearance with your mortgage company and don’t’ go back to work for 2 months, postponing those payments. Since you just returned to work, you postpone the third payment to get a head a bit. In total you have postponed $9,000 in total payments. After the 90 days is up, you receive your mortgage statement showing your payment due, but there is also a line item for $9,000 for the past three payments. Now that the forbearance period is over, the mortgage company wants to get caught up on the prior payments in one lump sum. How would that be handled if I haven’t been receiving income the past 3 months? That wouldn’t make sense. It may not be logical, but it is very possible that this is the approach some companies will take which, to me, is the worst case scenario.
Let’s look at another scenario. Your monthly mortgage payment consists of principal and interest payments. The principal is paying down your balance where the interest is the banks profit on the loan. It could be possible that they will only collect the interest on the loan and add your unpaid principal to your loan balance. That seems to be the best situation for all parties, in my opinion. The amount that has to be paid back is minimized, making it easier to get back on track, and the bank still receives the interest on the loan.
The problem here is there is no clear direction on how the delayed payments will be collected, not yet anyways. Before you stop paying make sure you work directly with your mortgage servicing company to understand how they are handling this. If you simply stop paying because the news said you could skip three payments, you run the risk of getting reported late to the credit bureaus and your credit scores will be worse as a result. That is just one example of the negative impact mortgage forbearance can have, if you don’t research it and handle it properly.
Please also remember, mortgage forbearance programs have been put in place to help those who need it as a result of the virus and the Shelter in Place mandate. If your income hasn’t been impacted, keep paying your mortgage. Don’t use forbearance unless you absolutely must. Again, this is not free money. Your loan payments are not being forgiven. You are simply moving them out to an unknown future date.
Please feel free to reach out to me directly anytime with any questions. We will all get through this soon. In the mean time I want to make sure you take all the necessary precautions to protect your most valuable asset, your home.
For more information, email Sean:
sean.herrero@rate.com
NMLS: 900669