Should You Request Mortgage Forbearance?
When the COVID-19 crisis starts, many banks begin to offer options to homeowners who cannot make mortgage payments or wish to take a break from mortgage payments. As of today, 9% of all home loans are in forbearance. According to Virginia REALTORS®:
More than 4 million homeowners have entered into mortgage forbearance over the past couple of months. While the numbers of new applications for forbearance have declined dramatically in recent weeks, at the end of May, about 9% of all home loans were in forbearance, including 7.2% of loans backed by Fannie Mae and Freddie Mac, and 12.6% of FHA and VA loans. Prior to COVID-19, only 0.25% of loans were in forbearance.
What Happens During the Forbearance Period?
Mortgage payments are paused
During the forbearance period, your monthly mortgage payments are paused; however, remember that your interest, property taxes, and insurance premiums continue to accumulate. Depending on your lender, the forbearance period can be anywhere between 3 months to 12 months.
Your credit is protected (maybe)
Although CARES Act is supposed to prevent a negative impact on your credit, many lenders do note the forbearance on your credit report, and some credit bureaus do lower your credit score. To protect your credit profile, it is best to check your credit reports and credit scores regularly while you are in forbearance.
You cannot refinance
Another vital thing to understand is that if you are taking advantage of forbearance, you will not be able to refinance your loan and take advantage of the historically low interest rates.
For the majority of homeowners in forbearance, this doesn’t matter since their jobs are impacted, and they would not qualify for a refinance anyway. However, there is a small percentage of homeowners in forbearance who do not need to be and are perfectly qualified to refinance if they wish to.
What Happens When the Forbearance Period Ends?
There are four outcome ranking from best to worst as below:
- Payment is deferred, which allows you to repay your missed payments at the time the home is sold, refinanced, or at loan maturity. This is the primary option for Fannie Mae and Freddie Mac loans. Although, you have to understand that some lenders will not refinance you if you are, or recently were, in a forbearance.
- Increased monthly payments. This option temporarily increases your monthly payments to force you to catch up on the missed payments. This is probably not a viable option for many people who are just coming back to work after a job loss or a long period of underemployment.
- Loan modification, which changes the loan terms, often by extending the loan period and/or lowering the amount of the monthly payments. However, some lenders may force you to proof hardship, which means that you may have to miss a few payments and also share your finances with the bank. Doing this could hurt your credit profile and not the right solution for everyone.
- Lump sum payment, which means you have to pay the entire amount of the missed payments at the end of the forbearance period. Obviously, this is a terrible option since I can’t imagine anyone that experienced financial hardship to be able to pull this off. Fortunately, lenders covered by federal forbearance rules cannot choose this option.
The best thing to do is to understand which of the four options you will be facing at the end of the forbearance period. If you cannot satisfy the requirement, you will be forced to do a loan modification, sell your house, or go into foreclosure.
Plan to Sell Now
If you know for sure that you cannot satisfy your lender’s conditions at the end of forbearance, it is best to plan now. If you have equity in your house, it might not be a bad idea to sell as soon as possible. In the DC, Maryland, and Virginia metro area, home prices are still very stable, and it is still a Seller’s market. By selling now, you are still getting top dollar for your house, and you won’t be competing against homeowners who are forced to sell when their forbearance period ends.
If you don’t have enough equity in your house, discuss the options of loan modification and short sale with your lender now to understand what lies ahead.