There have been a lot of headlines and talk from Government officials and media about Forbearance, and the ability to skip your mortgage payment if you are affected by COVID. I want to share some things you may not be aware of in relation to forbearance, and how, despite sounding like a good idea, it might actually be very bad for you in the long run.
The bottom line is that you should think very carefully before you agree to seek or enter into forbearance. If you have the ability to pay your mortgage, it is best to pay it. Forbearance really should be a last resort.
A Forbearance is a temporary postponement of mortgage payments during which the lender agrees not to foreclose on you. While it may mean that you won’t have to make your monthly payments for a short period of time, it doesn’t mean that those payments will never have to be made.
In fact, typically the payments that you don’t pay during forbearance have to be paid when the forbearance period is over. And that could be a big challenge for you if you decide to seek forbearance.
For example, if your monthly payment is $1,500 and you miss 3 payments during your forbearance period, you will owe all three of those payments, or $4,500 PLUS the next month’s $1,500 payment on the fourth month. That means that you will have to come up with $6,000 at the end of the period, or else your loan will be in default. If you go into forbearance for 6 months, that amount becomes $10,500, or your loan will be in default.
If you are unable to bring the loan current, it is up to the servicer of your loan whether they will allow you to modify the loan and add the payments to the end of the mortgage period or spread the amount over the next several payments. But they may not offer terms that are agreeable to you.
Here are some best case scenarios:
If they agree to spread the payments over a certain time period, you would see your monthly payments increase. So for example, if you missed $4,500 worth of payments and the servicer agrees to spread that payment over 12 months, your monthly payment would go up by $375. So if you were paying $1,500, now your payment would go up to $1,875.
On the other hand, if the servicer agrees to allow you to add the missed payments to the end of the loan, you still have to make up for the Escrow account contributions that you missed. So for example, if your monthly escrow payments are $500 a month and you missed 3 months, your monthly payments when your escrow account is reanalyzed will go up by $125 next year, or you may have to pay the servicer $1,500 to make up for the escrow balance before they will agree to anything.
And those are just hypothetical situations. The servicer may not agree or offer these types of solutions.
After your forbearance period, your credit report and credit score may be severely impacted if you can’t bring the loan current. And that could prevent you from refinancing, getting new credit, or even impact your cost of insurance and other credit-determined costs.
Entering into forbearance will affect your future plans, whether that is to buy another property, refinance into a lower rate or do a cash-out. Even if you do bring the forbearance current, you may not be able to get a new mortgage or a refinance for as many as 12 months after your loan is brought current.
In conclusion, forbearance is a serious decision. It is not simply skipping payments. Rather, it will have significant impacts on your mortgage, your credit, and your ability to stay in your home.
If you have already closed on your loan or you have an existing mortgage, you should reach out to your servicer to discuss BEFORE you miss any payments. And you should only do so as a matter of last resort if you are unable to make your payments.
If you are currently in the process of buying a home or refinancing, but have not yet closed on your loan. You should seriously consider NOT MOVING FORWARD if you are concerned or think that you may need to seek forbearance due to the COVID situation. It’s just not worth the risk to put yourself in a bad position.
At Christensen Financial, we want the best for our customers. We understand this is a difficult time, and there are a lot of things outside of everybody’s control happening. Unfortunately, some people will need to seek forbearance, and if you do, our thoughts and prayers are with you for a speedy resolution and improvement in this situation. However, if you are able to make your payments and don’t absolutely need to seek forbearance, you should really consider the risks and costs that we’ve just talked about. And if you are currently in the process of your loan and concerned that you might need to seek forbearance, we really don’t want to put you in a position where you may not be able to afford your mortgage. Closing on a transaction is not as important as your long-term financial health and well-being. And certainly, that is what matters most during this time.
If you have any questions whatsoever, regarding forbearance or your transaction with Christensen Financial, please call our corporate office directly and you can speak with one of our managers. We are a family-owned business, and we are here for you.