In this time of COVID-19, our society is temporarily in uncharted waters. With a shutdown of most business and commerce, this means income in some cases have been paused as well. Inevitably this begs the question of whether people will have the cash reserves to service their debts and cover their living expenses in the meantime. As a result, you may have heard the term “Mortgage Forbearance” recently in the news and I will attempt here to explain what that is.
**There are large amounts of misinformation and blanket statements circulating about this topic and this article is not intended as specific advice for your situation. It is up to you to do your own homework and seek guidance from your specific lending institution.**
According to Investopedia: Mortgage forbeareance is “an agreement made between a mortgage lender and delinquent borrower in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a mortgage plan that will, over a certain time period, bring the borrower current on his or her payments.”
At first glance, this sounds great to many and absolutely a necessary to some. However, there are caveats…they are listed below:.
- This is forbearance, not forgiveness. This is a suspension (or deferment) of your debt obligations, not a cancellation of it. It is not free money or a “freebie”. Banks will expect to be paid; and will collect. Forbearance typically means at the end of the term (3, 6 or 12 months), a balloon payment is due. Are you certain you’ll be able to afford such a payment?
- Not all servicers are alike, so be sure to contact them (if you can get them on the phone). Being proactive here is key since millions of Americans are calling their lenders. Be prepared to wait on hold.
- Forbearance is not a loan modification, the latter is a more formal and permanent scenario which restructures the loan. Forbearance is inherently temporary.
- There is some dispute on whether forbearance will affect your credit which could make it more difficult to buy another home in the near future. As of this writing, loan servicers and credit bureaus have not given crystal clear guidance on this aspect, but it should be considered if you expect to take out a loan in the near term.
- Forbearance doesn’t mean you don’t have to pay your escrow obligations such as taxes and insurance. A lot of loan servicers are not going to pay those for you.
- Beware blanket statement from news outlets about this topic. As I said above, your specific lending institution are going to give you the parameters of what they’re willing to offer.
For some people, even with all the above factors forbearance is something they must do. Many of my colleagues and I agree that this isn’t a decision you should take lightly and Gathering the facts from your particular lending institution and keeping an eye out for new information is extremely important right now. Many conscientious lenders I know are saying your mortgage is the last payment you should consider skipping and I tend to agree. Not only from a potential credit standpoint, but a financial one as well.
As always, I am happy to help anyone who may need it and will continue to keep you all up to date on this evolving scenario… and don’t forget to Ask Seth Anything.
Operating Partner and Leader of The Seth Lejeune Team at RE/MAX HOMEPOINT. Founding Partner at BWB Capital – asksethanything@gmail.com / 610.804.2104
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