How Does Mortgage Loan Forbearance Impact Refinancing or Buying a House?

Can you buy or refinance after your divorce?  The question is always complex, but right now it is even more so.  During COVID, many homeowners took mortgage loan forbearance to help manage the financial squeeze that the pandemic caused.  For those unfamiliar with the term, forbearance basically means that a lender is allowing a borrower in crisis to cease payments for a period of time. It has no adverse impact with the understanding that you will resume payments once the difficultly has passed.  While this usually requires a proof of need, a blanket forbearance was generally granted across the entirety of the mortgage market during COVID.  This undoubtedly saved many people from ruin, but this lifeline was not without impact.  Post forbearance for mortgage loans do have some considerations that any homeowner, especially those emerging from a divorce when court required timelines are part of the requirements.

Here are four things that you need to consider if you think or know that you were in forbearance.

Where You in Mortgage Loan Forbearance?

This likely seems an odd thing to highlight, and I am by no means pointing out shifty lender behavior, but rather a lack of communication in cases where there are multiple borrowers.   Under these circumstances, it is not uncommon for one borrower to handle loan matters; while the other is less involved. One may have chosen forbearance and not notified the other.  You can find this out with a simple phone call or a visit to a servicer website. However, do not assume that you were not in forbearance.  You would be surprised at how many times I see a co-borrower get blindsided by something that their co-owner may have done.

What Were the Terms of Your Mortgage Loan Forbearance?

These are generally the same across the loan industry, but your situation will be unique to you.  Your servicer will likely have a website that you can access for all your loan documents. One of these will be your forbearance agreement, specifically when you entered forbearance and for how long the forbearance was in effect.  You should access this, print it out and review it in detail.  It can help you not only understand when you did not pay your mortgage, but also how any payments that you did make should have been applied to the balance.  In some cases, a payment reverts to the first month you entered forbearance.  In other cases, it may have been applied to the current payment due.

What Were Terms Under Which You Exited Forbearance?

In most cases, borrowers were given the several options.  The first was to settle deferred payments in a lump sum.  The second was to enter a payment plan under which a borrower would settle the unpaid amount over a 6- or 12-month period of time.  The third and most popular was deferment of the unpaid amount to the back of the loan.

This third option presents the most confusion as there is variance among loan servicers as to how this is executed.  Some simply extended the term of the loan and left everything else unchanged.  Essentially, they turn a 30-year loan into a 30 plus year loan.  This is uncomplicated and, based on my experience, represents the least challenges for later transactions.  In some cases, however, the servicer modified the loan agreement.  Essentially, they execute the aforementioned changes, but they do so by creating a new loan note.  The result is the same for payments in an existing loan, but a modification can create issues. Many loan programs have specific limitations for clients who have entered into a modification.

What Are the Post Forbearance Requirements for a New Lender?

This is the flip side of the resolution that you have selected.  In much the same way that different loan servicers are dealing with forbearance in different ways, mortgage lenders are approaching new applications with different requirements.  Some for example, require proof of three payments post forbearance while others are requiring six months.  Some lenders will consider payments prior to officially exiting forbearance. Others will only consider payments made after officially exiting forbearance.  In the case of modifications, some lenders are overlooking the modification designation. Yet, others holding firm that a modification cannot be overlooked.  Before fully applying you need to ask your potential how they are interpreting the rules and how it will impact you.  In the case of divorce, forbearance can add additional post-divorce time. You may need to wait before getting a loan approval, which needs to be a consideration for any agreed upon timelines.

The best advice that I can give is to understand these considerations. Working with a lending professional on the new loan can help you navigate the process.  Low-cost providers can sometimes contribute to negative outcomes.  For example, one of my clients had their loan declined because a lender did not discuss forbearance up front. They interpreted the post forbearance guidance in the most draconian way possible, i.e., 6 months vs 3 months required payment.  This issue cost them a very favorable rate as by the time the issues were identified, the mortgage rates had increased substantially.  If this had been a purchase, the deal would have been dead, and the client would not have gotten the house.  You do not want to have anything in common with my client and with a bit of planning, you will not.

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