We have added a plethora of new words and phrases to our common vocabulary over the past several weeks: flatten the curve, social distancing, furlough, PPE, virtual calls and meetings. However, if you are a homeowner, the word forbearance has probably come up multiple times. While the idea of forbearance sounds great, it might not be all that it is cracked up to be. Before jumping on board and skipping those mortgage payments, here are some things to consider. Ask questions, because each mortgage servicing company is handling forbearance in different ways.
1. What are the terms for payback?
There are two different ways in which mortgage servicing companies are handling repayments. First, you miss three months of loan payments and they tack three additional payments (and interest) onto the end of your loan. This is by far the best option for payback. Another way, which is more common, is that a balloon payment of four months is due all at one after the forbearance period ends. For example, you enter into forbearance for May, June and July. Those three months would be missed payments. Your next payment in August would also include May, June, and July. This could ultimately cause more financial hardship, as you would be responsible for four mortgage payments at once.
2. Will it show up on my credit in any form?
Although you hear that it will not affect your credit score, the truth is it might have an impact on your buying power in the future. You overall credit score might not go down due to the missed payment, but your credit will be marked as “in forbearance”. This could cause you not to be able to obtain new credit or have a negative effect on refinancing or buying a new home in the future.
3. What other options do I have?
Your lender might have other programs or options that could help you through these difficult times without entering into forbearance. Ask your mortgage servicing company the following questions: Will they accept partial payments? Can you pay your principle and interest only and delay your escrow payment until later in the year? Find out if they have any relief options that might be better suited to help you, while also avoiding negative impact on your credit or extra pressure of making a large lump sum payments down the road.
4. Will this affect me refinancing or obtaining another mortgage? If so, for how long?
As mentioned in the credit section, entering into forbearance could cause issues with you being able to buy a new home or refinance in the near future. If you’re planning to move or refinance within the next 12-24 months, then it is recommended you to avoid forbearance… you might not be able to obtain a loan or it could negatively impact your interest rate.
Remember, at the end of the day, forbearance isn’t forgiveness. Either way the payments will be due at some point in time. Make sure to get everything in writing and review it before agreeing to move your loan into forbearance. If you are able to make the payments, then do so, but if it’s the difference of putting food on the table then the choice is an obvious one.
Want to know more about the real estate market? Check out my other post about Selling and Buying your home virtually.