Recently, our team has had several homeowners reach out, asking about their options in paying their mortgage during a time when their income may be diminished (or eliminated entirely) as a result of COVID. Some are wondering whether they should take advantage of mortgage forbearance or whether they should sell their home.
Not surprisingly, there’s a great deal of misinformation out there with regard to forbearance. Let’s talk about the basics of forbearance, and how it might (or might not) be an option for you.
Forbearance in a nutshell
Make no mistake – a forbearance plan is not a gift. Some forbearance plans let you skip some, or all, of your mortgage payments for as long as a year. Others offer reduced payments, or interest-only payments, for a few months. And forbearance is typically only available to homeowners with a solid credit history.
Why would a mortgage lender agree to forbearance?
Lenders who are not open to forbearance plans may find that they must proceed with foreclosure against the homeowner. The foreclosure process is lengthy and complicated. Because of this, mortgage holders are often willing to be creative and agree to some sort of short-term forbearance plan.
Forbearance could be a helpful lifeline, but isn’t a perfect solution
Skipping mortgage payments for many months sounds like a lifeline, especially if you’ve lost a job or had substantially reduced work hours.
However, forbearance will lead to credit issues in the future, and may only delay the inevitable need to sell your home once your forbearance period has ended.
Challenges with forbearances
The money not paid during the forbearance period is still owed to the lender and must be repaid in the future.
There are three ways this typically happens:
- Loan modifications. The lender rewrites the mortgage to include the amount not paid during forbearance. This means your mortgage payment will likely increase after the forbearance. However, some lenders are willing and able to change the interest rate or the length of the loan, so you may not see a substantial increase in your payment.
- Lump-sum repayments. You can elect to repay the entire missed amount in a lump-sum payment. Note that lenders covered by the federal forbearance rules cannot require this option – it is entirely up to the homeowner.
- Payment plans. You make larger monthly payments until the forbearance amount is paid in full. Once that happens, your monthly payments revert to the pre-forbearance level.
If you take advantage of a forbearance plan, be aware that you likely will not be able to refinance your home for a period of 12 months after the forbearance period ends. Lenders want to see a return to normalcy in terms of finances and payments.
However, the FHFA recently announced that some loans may be eligible for refinancing in as little as 3 months, rather than 12 – provided that three consecutive on-time payments are made after the forbearance period ends. This option is not currently available for FHA, VA, USDA, and some other loan programs.
Forbearance and your credit score
In theory, COVID-19 mortgage forbearance should not count against your credit. Rules state that skipped payments cannot be reported as “missed” or “late” payments. However, lenders are required to accurately report missed and late payments. This means that payments will likely be reported as such, and the forbearance should be wiped from your credit report once you are back to a normal payment schedule.
However, mistakes can (and do) occur in credit reporting. And if you’ve ever had an error on your credit report you know what a nightmare it can be to fix it.
Strategies for avoiding forbearance
Forbearance should be a last resort. But what options do homeowners have? Here are several you may want to consider:
- Use your government stimulus check toward the mortgage.
- Withdraw money from your retirement account. The CARES Act allows hardship withdrawals, and you have three years to pay the taxes on the withdrawal.
- Borrow from a credit card.
- Leverage overdraft lines of credit.
- Ask for help from relatives and friends. Yes, this is a tough thing to do but may be a viable option for you.
- Sell your home.
The information we’ve shared here is general, and every homeowner’s situation is unique. Please feel free to reach out to us with the particulars of your situation. We can work with you, and a skilled mortgage professional, to help you determine the best option for you and your family.