Have you been considering utilizing a mortgage forbearance program? Since April, over 7% of American homes have accessed a forbearance program to delay their mortgage payments. The program provides temporary relief by allowing them to push payments for 90 days, with the option to apply for an extension as long as one year.
What Homeowners Should Know About Mortgage Forbearance Programs
If you’re seeking relief from mortgage payments, there are some things you should know before making a forbearance request.
1. They Are Not Forgiveness Programs
Mortgage forbearance allows you to delay your mortgage payments for a certain time period. You can either delay these payments in full or for a partial amount.
The key here is that you will have to pay the delayed payments back later. Requesting a mortgage forbearance does not mean your payments are forgiven and will never need to be paid.
The initial delay time period is 90 days, which can be extended up to a full year, but only in three or six-month increments. So delaying payments for a full year adds up to requesting extensions two to four times.
Once you’ve maxed out your delay period, all the payments you missed come due. How you pay them back depends on your lender. If Fannie Mae or Freddie Mac owns your mortgage, you won’t owe a giant lump-sum on top of regular mortgage payments, but rather have a longer loan period or slightly higher monthly payment amount.
However, other lenders may request a lump-sum payment once the forbearance period ends. Meaning that if you delayed payments for five months, you would owe five months of mortgage payments on top of your regular monthly payment.
2. They May Impact Your Ability to Refinance Down the Line
It’s been confirmed by several of our lenders that any loans in forbearance may need to show a year’s worth of consistent payments before being approved for a new loan.
Rates are great now and we forecast they will remain low through the end of this year. By taking a forbearance on a loan, homeowners may be unable to refinance to a lower rate for an entire year. Instead, they’re stuck paying a higher mortgage rate, plus paying back all the monthly payments they delayed.
Borrowers who request forbearance may miss out on significant savings. The limited ability to refinance means paying higher monthly payments for at least 12 months.
3. They May Affect Your Credit Profile
Mortgage lenders have the option to report mortgage forbearances to credit bureaus. Even though the lender agreed to allow the delinquency, they will show up on your credit report as “delinquent payments.” Reporting forbearances to credit bureaus is not required, however. Check with your lender and forbearance agreement about their credit bureau reporting measures before you start delaying payments.
If a lender does report your forbearance, the three major credit bureaus – Experian, Equifax, and TransUnion – all have agreed to not negatively impact scores based on coronavirus-related forbearances.
But any reporting at all will negatively impact your standing to future creditors. After a forbearance, you may need to show proof of making payments for a year or longer to get back in creditors good standing. Having a forbearance on your credit report may also limit your future credit standing with other lenders like credit cards or personal loans.
4. Not All Loans Have Equal Forbearance Options
Private loans – which make up about 30% of the mortgage market – are not covered by the government CARES act. Some states like California have created their own rules to extend the forbearance coverage to private loans. Other lenders are following federal guidelines even though they aren’t mandated too.
However, due to their size, private lenders may be less able to deal with multiple months of forbearances without government assistance. If you worked with a private lender for your mortgage, talk to them about their forbearance policies before you act.
The Bottom Line: Request Forbearance Only if Necessary
You shouldn’t consider a mortgage forbearance unless you absolutely need the financial relief. While it might be tempting to stall payments and put your mortgage payment money to another use, that sort of thinking will likely hurt you in the long run.
As we mentioned, the consequences of taking a forbearance are steep:
- Possibly waiting as long as 12 months with proof of consistent payments before you can be approved for any new loan
- a history of delinquency on your credit report
- the large sum of back payments you’ll owe once your forbearance period ends
Also, let’s not forget the stress of making up your delayed payments, either by way of a longer loan term, high monthly payments, or owing a large lump-sum.
As an alternative to forbearance, first look at lowering your monthly payment via a refinance. The monthly savings might be significant enough to provide some financial relief. Call a Solidify mortgage advisor to get details on available rates.
Other Options Besides Forbearance
A cash-out refi or a home equity line of credit (HELOC) may be good options in lieu of a mortgage forbearance.
Many lenders have suspended their HELOCs and cash-out refinance programs or hiked up pricing so much that demand has plummeted. However, some of our lenders are taking a “wait and see” approach and still working with borrowers.