Some things to Consider before you do Forbearance with your Mortgage

Politicians and the media have made it sound like entering into a forbearance with your mortgage because of the pandemic is something that many Americans are taking advantage…and maybe you should too, right? Well…maybe not.

Mortgage servicers may have different plans. A major bank’s website is currently offering this as forbearance:

  • For 3 months, you won’t be charged a late fee if you miss a payment.
  • We’ll contact you during the 3 month forbearance period to make sure you’re doing okay, but we won’t make collection calls or report any missed or late payments to the credit bureau.
  • Forbearance and these protections don’t defer payments until the end of the loan.
  • When your relief period ends, any missed payments will be due. We’ll be in touch to explain options that may be available for you to repay these amounts. This may include options like extending your payment assistance period, adding the missed principal and interest to the end of your loan, a repayment plan or a loan modification.

This bank adds:

Why can’t you just forgive the missed payments?

  • Some announcements in the news may lead you to believe your mortgage company can offer payment forgiveness.
  • With forbearance, you can miss payments for 3 months. However, missed payments are due at the end of the 3 month period. If you’re not able to make the payment at the end of your forbearance period, we’ll contact you to discuss mortgage assistance programs to help you bring your payments up to date.

Here’s what another major bank offers on their website:

Important considerations in a forbearance plan

  • Your regular monthly mortgage payment may be temporarily suspended or reduced for a specific period, allowing time for your financial situation to improve.
  • During this time, you’ll have a new monthly mortgage payment to make instead of the payment amount that appears on your monthly statement.
  • You must contact us on a monthly basis to provide regular updates on your financial status.
  • At the end of the forbearance period, the payment amounts that were suspended or reduced during the forbearance period accrue and may be added to your mortgage amount. At that time, we’ll work with you and review your financial situation to see if you’re able to repay the forbearance amount, or if a long-term option like a loan modification is available to you. If you cannot keep your home, we’ll explore options that may help you avoid a foreclosure sale. If long-term assistance is not available to you, the total amount of payments that accrued during the forbearance period becomes due and payable.

Here’s something to consider… although the talk is that if you proceed with a forbearance plan with your mortgage servicer (who you make your mortgage payments to) that it won’t impact your credit scores, it will most likely still show as missed (unmade/delayed) mortgage payments on your credit report for those specific months credit reports that mortgage lenders use show each monthly payment, what was paid and if the payment was not paid.

Current mortgage guidelines view 3 missed mortgage payments as a potential foreclosure. With a foreclosure, there are wait periods before you can qualify for a new mortgage. Current FHA guidelines have a 3 year wait period since the last late payment and conventional guidelines have a 7 year wait period after the last late payment for a foreclosure. In addition, cash out refi’s and financing for second or investment homes are not permitted until the 7 year period is over.

We simply do not know at this time what the underwriting guidelines will be once this pandemic is behind us. Maybe lenders will make exceptions for people who are economic victims of covid-19… with the mortgage meltdown crisis in the late 2000s, this was not the case and many people lost their homes. At the very least, I can see lenders increasing the requirements for mortgage loan applications to reduce their risk. It was recently announced that Chase Bank is raising their standards to a minimum 20% down payment and 700 credit scores or higher to qualify for a mortgage loan.

Bottom line, I think mortgages will be more challenging to obtain in the future and those who opted for forbearance plans, may they have to wait a while before they can buy or refinance.

Please stay safe and healthy! PS: My sweet Mom made me the mask 🙂

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