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Forbearance

April 19th, 2020 9:28 AM by Sam Kader

One of the option available to homeowners to skip a few payments due to the coronavirus pandemic is a forbearance.  Forbearance is when your mortgage servicer (that's the company that send your monthly mortgage statement) allows you to pause or reduce your payments for a limited period of time. Forbearance does not mean that your mortgage payments are forgiven or erased forever. It's simply a temporary relief during this pandemic and you have to repay your missed mortgage payments at some point in the future.  

Forbearance itself does not hurt your credit score but it does show up on your credit report. This will affect your ability to qualify for another loan in the future. It can also result in your other creditors decreasing your available credit balances which will in turn decrease your available credit line utilization - a key component of credit scoring models. 

Forbearance is made at the sole discretion of the lender. You should not wait until you have missed monthly mortgage payments to request mortgage forbearance - you must request it to each mortgage holder as it is not automatic. The initial forbearance period usually is for 3 months with an option to skip mortgage payments for up to 12 months (in most cases) with no supporting documentation. But wait, there's more. 

These are 3 very important questions before you go down this rabbit hole:  

1. Can you afford to make your mortgage payment? If you have the savings put aside to weather the storm or have a stable job in an essential industry, then please continue making payment. There is no reason to risk a problem when it is not necessary, and it is always a good idea not to ask for help before you need it. If you genuinely cannot afford to pay your mortgage, then you should reach out to your lender/loan servicer immediately for the assistance offered.  

2. Escrow/Impound account - if your monthly mortgage payment includes payment for property taxes and property insurance - confirm with your servicer if you could continue making this smaller portion of your mortgage payment during the forbearance period. Make sure you let your servicer know that the check/payment is for your impound account. 

3. What will happen to payment skipped? It varies by lender but most will likely ask for you to "catch-up" when the forbearance period is over. As of May 14th. Federal Housing Finance Agency (FHFA), FreddieMac and FannieMae (Government Sponsored Entities or GSE) have announced the following repayment options: 

  1. Full repayment or reinstatement. Missed payments are repaid, putting the loan back on track (Freddie has recently revised this option).
  2. A repayment plan which allows borrowers to pay their regular monthly payments and an additional amount so they can catch up gradually.
  3. Payment deferral. This would keep the monthly payments as originally agreed. The missed payments are added or pushed back to the end of the loan or when the house is refinanced or when the house is sold. (I think that this is an ideal solution for most homeowners).
  4. Loan modification. Changing the interest rate, loan term, or some other feature to lower the original payment amount (supporting documentation will be requested this time). 
Both FreddieMac and FannieMae also reiterated that borrowers will never be asked to repay missed payments in one lump sum (option 1 above). Borrowers will be contacted prior to 30 days expiration of their forbearance to discuss repayment options. If you feel that your loan is not being handled properly, you should contact Consumer Financial Protection Bureau

As of May 19th 20, The Federal Housing Finance Agency (FHFA) has announced that FannieMae and FreddieMac will permit borrower to obtain a new mortgage if they met the following criterions: 

  1. They have reinstated their mortgage or have continued to make their mortgage payments despite being in forbearance or
  2. Where forbearance has ended, eligibility will be dependent on making three consecutive payments under a repayment plan, a loan modification or the payment deferral option (mentioned above).  

Posted by Sam Kader on April 19th, 2020 9:28 AM

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