Everyone with a mortgage right now seems to be talking about forbearance and they should be. It can be a great tool that lenders provide to help their clients through a tough time. It is nothing necessarily new and lenders have always provided forbearance, forgiveness and modification as methods of weathering financial storms. I have worked with divorcing clients, as an example, to help evaluate mortgage forbearance and other solutions to make it through tough times, like the dissolution of a marriage when income can change drastically. In the past, forbearance has been generally more needs based and individually applied. During the coronavirus and the economic meltdown, lenders are offering forbearance on a grand scale without the requirement to qualify or validate your hardship.
Is Mortgage Forbearance for You?
To know whether forbearance is a good option for you, you should understand what actually occurs. During mortgage forbearance, your loan is basically frozen for a set amount of time. During this period, you are not required to make payments and you will not be assessed as late on your credit history. Additionally, you will not be subject to late fees. You will, however, be required to get current after the agreed upon period.
Your Mortgage is Frozen for the Time Being.
There is some partial or misinformation as to what this means. Some are reporting that lenders tack the payments on the back end of the loan. I have yet to see this as an option as the banks generally want to be paid sooner than later. I have also seen reporting that the full amount is due at the end of the forbearance period. This is partly true, but it is not necessarily a balloon payment as many are interpreting it as. Granted, if you wanted to pay the back payments in one single payment, you can absolutely do so and the banks would gladly accept it. What generally happens is that the bank will work with you on options to get current on your loan which works for your situation most commonly a repayment plan and a modification.
What is the Repayment Plan for Mortgage Forbearance?
In a repayment plan, you will have the accrued payments distributed over a set number of months at the end of forbearance. Right now, most lenders are communicating 3 to 6 months based on your need and situation. So as an example, if your payments is $600 and you take forbearance for 3 months, you will owe $1,800. At the end of the 3 months, you would have $300 to your payments for 6 months. You would, of course, need to plan for your new $900 payment to stay current.
What is Modification?
In a modification, the lender will alter the terms of your loan to enable you to repay the loan. This can mean anything from the interest rate to the term of the loan, i.e. adding payments to the loan to lengthen the amortization. Modifications are very specific to the situation of the borrower and, as a result, you need to prepare for the conversation with your lender. They are going to want to know everything from your income to your assets. In a sense, they will be reapproving you for a new loan with the goal of providing a suitable plan that meets your budget while ensuring that nobody is working the system to get a benefit that they do not need.
As I always advise, you should know your options and understand the costs/benefits of selecting a mortgage option to get you through a crisis. Too many people do not ask for help whether out of not knowing the options available or based on pride. Sometimes, this actually results in late payments and foreclosures that could have been avoided. You should not let yourself fall into this trap. Get the help you need to get the right new start after COVID-19 or whatever crisis you are facing.