If there is one word in the mortgage world today that gets thrown around more than any other since the COVID-19 pandemic started, it is forbearance. Forbearance is the act of refraining from the legal right to enforce payment of a debt. Most all servicers of mortgage debt have in the past two months have enacted some level of allowance for payment relief for their customers, if necessary.
Over 40 million Americans have filed for unemployment since mid-March. Over the course of the same time, 3.5 million homeowners have requested some period of forbearance, from making their house payment.
There are several important pieces of information that consumers should know, prior to considering forbearance.
First, do not do anything without contacting your mortgage servicer. They will be able to lay out potential options for you surrounding forbearance. Know that forbearance is NOT forgiveness. While you may be eligible to take anywhere from a month to a year off your payment plan, there will be repayment of that debt sooner or later. Some servicers will extend the term of your loan, some will adjust your monthly payment to a higher amount once you are out of forbearance until the “owed” debt is repaid, and some will require the entire debt to be paid as soon as you are out of your forbearance time allotment. It is best to explore those options and understand the commitment you are making before you decide upon forbearance.
Second, this increase in forbearances has had some consequences for prospective home buyers – such as the tightening of credit guidelines. Many lenders are requiring better credit scores, more stable job history, lower debt-to-income ratios and a higher percent of down payment. When a customer is granted forbearance from their mortgage servicer, the mortgage servicer must still pay the investor, in most cases. So, no monthly payments from the consumer coming in the front door, but the debts still must be paid. In most cases, mortgage servicers are required to make those payments on the consumer’s behalf to the end investor for principal and interest, the county tax office, and the homeowner’s insurance agent. Currently, there are several proposals from the government to step in and help mortgage servicers with some of these losses, which are well into the billions of dollars.
Finally, if you are experiencing true financial hardship through loss of employment or a dissolving asset portfolio, forbearance is still a much better option than just not paying your mortgage. Not paying your mortgage can result in rapidly falling credit scores, mounting late fees, and worst case, foreclosure and seizure of your home. For some, forbearance can alleviate short term pressure on a family’s financial obligations, knowing that once employment resumes, they can “catch up” on payments quickly. If you are experiencing this reality as a consumer, contact your mortgage servicer right away to see what options may exist for you.
Written by Lance Smith, President of Results Mortgage and nearly 20 year mortgage industry veteran.