Should You Apply for Forbearance on Your Home Loan?

Should You Apply for Forbearance on Your Home Loan?

Forbearance is a process whereby homeowners are allowed to have their monthly mortgage payments suspended.

This new term has come to the forefront for many due to the number of those who have been unemployed or otherwise facing a furlough from their employer.

More than 3.5 million mortgage borrowers had asked for forbearance as of late April, according to the Mortgage Bankers Association.

And yet, there’s still some uncertainty as to how the forbearance process actually works.

Forbearance does not mean mortgage debt is reduced. All money owed to the lender is still owed. What’s changed is the repayment schedule.

There are several ways to repay the lender once forbearance ends.

  • Payment Plans. You repay the lender by making larger monthly payments once forbearance ends
  • Loan modifications. The lender changes the loan terms. Maybe the interest rate can be reduced, the loan term extended, or both. You could reduce your monthly payments altogether while still paying back the forbearance sum
  • Lump-sum repayments. You can, if you elect, repay the entire missed amount as a lump sum once the COVID forbearance period is over

Many homeowners feared they would owe up to 12 months’ worth of payments at the end of their loan term. That means, at year 30 of a 30-year fixed $300,000 loan, you would need to come up with nearly $17,000, or lose your home.

A lump sum repayment might be required under normal circumstances. But it’s hardly a feasible solution for borrowers who have been laid off or put on reduced pay due to COVID-19.

Thankfully, borrowers who have conventional loans backed by Fannie Mae and Freddie Mac won’t be asked to make a lump sum repayment for their coronavirus forbearance.

Simply put, if you are a homeowner seeking forbearance and Freddie Mac owns your loan, you are never required to make up missed payments in a lump sum.

This is good news for borrowers. It means they’ll have access to alternative repayment plans — whether they accept larger monthly payments after COVID-19 is over, or restructure their loan to incorporate the missed amount and keep payments low.

On the downside, FHFA’s announcement didn’t clarity how those alternative repayment plans will work. If there is a standard process, FHFA hasn’t made a clear announcement about it yet.

So for now, borrowers still need to work with their loan servicers one-on-one to come up with a repayment plan that will make sense for their unique situation.

However, there is one more caveat….

Forbearance will affect your chance at getting new loans

You should only look at this option if absolutely necessary. Forbearance should not be used to fatten your purse for a few months; it should only be used if you are in financial dire straits and need some relief. This is especially important to remember if you are planning on buying a new home or refinancing in the upcoming months. Mortgage companies are not approving new loans for them until they have been out 6-12 months.

To learn more, contact me at tera@teragilbert.com.

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