“Forbearance.” You’ve been seeing this word in headlines, and hearing it on the news. Why is everyone suddenly talking about forbearance? Because it’s an important tool the mortgage industry can use to help property owners make it through any financial hardship caused by the COVID-19 coronavirus.
Most people don’t know what forbearance means. If you’re in that particular boat, get started by checking out our blog on what mortgage forbearance is (and isn’t!). Once you’re clear on the basics, read on to learn how forbearance works, the short-term benefits you can expect, and the longer-term implications you should understand.
Is mortgage forbearance right for you? By understanding your options, you can make the decision that’s right for both your finances and your family.
Homeowner Options for Mortgage Forbearance
Mortgage forbearance programs typically take two forms. In either scenario, you work with your lender to set up a payment plan that will ultimately help you resume your regular mortgage payments.
- Deferred mortgage payments. In this scenario, it’s most likely that payments deferred during the forbearance period will be added onto the end of your loan period.
- Reduced mortgage payments. In this scenario, you and the lender agree upon reduced mortgage payments for the forbearance period. The unpaid portions of the mortgage payments are most likely added onto the end of your loan period.
How long of a mortgage forbearance period can coronavirus-impacted homeowners hope for?
The FHFA announcement, which applies to government-backed loan programs, indicated forbearance periods of “up to 12 months, depending on their particular situation.” The HPC, which represents the mortgage industry organizations backing conventional loans, proposed a plan providing “an initial 90-day forbearance that could be extended to 12 months.” That said, the length of your mortgage forbearance period will depend on your mortgage payment history, financial circumstances, and the terms of the special agreement you make with your lender or creditor.
Homeowner Implications of Mortgage Forbearance
- Peace of mind. You don’t have to worry about losing your home during the forbearance period.
- Increased financial flexibility. Forbearance frees up cash in the short term, allowing you to use it for more immediate costs impacting your health or well-being (e.g., groceries, utilities, health care, debt repayment you’re unable to defer).
- Time to improve your finances. The whole point of forbearance is to give you time to get back on your feet.
- Protection for your credit score. Forbearance can help you avoid the profoundly damaging impact foreclosure would have on your credit score.
- Accruing interest. Interest will continue to accrue during your forbearance period. The bottom line of how mortgages work is that the longer it takes you to pay off your loan, the more interest you’ll pay.
- Longer repayment term. Unsurprisingly, deferring or reducing payments now will require making additional payments in the future. In most scenarios, this means it’ll take you longer to pay off your mortgage. For example, a six-month forbearance deferring payments would mean a loan payoff rescheduled at least six months later. Depending on your interest rate and forbearance terms, it could take significantly longer.
- Potential lump-sum repayment. Some forbearance programs require lump-sum repayment of the deferred or reduced payments. While the recent announcements don’t seem to suggest this will be a common arrangement — the idea, after all, is to help coronavirus-impacted homeowners find solutions that will be realistic for their finances — it’s crucial that you take the time to fully understand the terms of your forbearance agreement.
- Increased monthly mortgage payments. As we mentioned in our “What Is Forbearance?” blog, forbearance doesn’t apply to your escrow account, which your lender uses to pay property taxes and homeowners insurance on your behalf. Lenders will ultimately have to recoup these costs. One solution may be to increase monthly mortgage payments following your forbearance period.
- Potential lump-sum escrow payment. A second potential solution for recouping escrow costs? You could be responsible for making a lump-sum escrow catch-up payment at the end of your forbearance period.
- Potential impact to credit score - if you mess up. Let’s be clear: If you stick to the terms of your forbearance agreement, forbearance can be a great solution. It may not impact your credit score at all. But your lender does have the option to report late or missed payments to credit bureaus. That means failing to stick to the terms of your forbearance and mortgage agreements could negatively impact your credit.
How to Talk to Lenders About Mortgage Forbearance
If you’re a homeowner whose finances have been seriously impacted by the COVID-19 coronavirus, how do you go about talking to your lender about deferring or reducing mortgage payments?
- Check your lender’s website for any guidance specific to COVID-19 or coronavirus forbearance programs. It may provide helpful guidance, specific numbers to call, or information about how to begin the process of requesting mortgage forbearance.
- Proactively contact your lender to see if forbearance is an option for you. If you found specific guidance on how to initiate the process, follow it. If not, just give them a call. Have a recent mortgage statement handy for quick reference. Be prepared to clearly explain your circumstances, showing how your finances have been impacted by coronavirus. Valid circumstances are likely to include illness due to coronavirus, job loss, childcare disruptions, and business hardships (e.g., restaurants, retailers, or other businesses forced to shut down).
- Ask about your escrow account. Throughout your forbearance period, your property taxes and homeowners insurance premiums will still be paid by your lender. Ask your lender what their preferences are regarding escrow payments. You may need to make a lump-sum catch-up payment at the end of your forbearance period. Alternatively, your monthly mortgage payments could increase as your lender recoups these costs.
- Be prepared to provide supporting documentation… at some point. Lenders are eager to help, so documentation (e.g., financial records, letters) may not be required on day one. But it’s likely that they will ask you to produce it at some point.
Seriously, call your lender ASAP if you think there’s any risk you may miss a mortgage payment. Nobody wants to put anybody out of their homes right now. They genuinely want to help you. Let them.
Get this far without understanding what forbearance really is? Read here!
Or are you a landlord trying to understand your forbearance options? Read here!
Covered wants to help!
From our family to yours, let’s get through this together.
- Covered is teaming with mortgage servicers to help homeowners proactively lower their homeowners insurance costs. This goal is to help minimize the potential budget jolt of increased monthly mortgage payments (caused by the need to “catch up” on escrow payments toward taxes and insurance). But there’s no need to wait to get started! Let our Digital Insurance Marketplace do the homework, or have one of our expert insurance advisors do a free policy review. Bundling, increasing deductibles, or adjusting your coverages or limits may help you find the best value for your budget.
- With interest rates at an all-time low, refinancing your mortgage may help you reduce your monthly mortgage payments for the longer term. Learn how refinancing works.
- Understanding your mortgage agreement can feel daunting. Check out Covered’s Mortgage 101 series for A Guide to Understanding Basic Mortgage Terms and How Does a Mortgage Work?