Many lenders and "servicers" of loans are offering forbearance options on mortgages as a result of the economic downturn from Covid19. You may be considering this as an option for you and your family. Whatever the case, you should understand the ripple effects a “Forbearance Agreement” with your lender may have on you.
What is “Forbearance”?
If you borrowed money to buy your home, you pay a monthly house payment. If you don’t pay your mortgage, eventually you will lose your home through foreclosure. If you find yourself having trouble making ends meet, you have options through the CARES Act for a Forbearance agreement.
Depending on your lender and the program they offer you, “Forbearance” is the granted agreement NOT to make your house payments, or to modify them for a temporary period – usually 3 months. Through agreement, the lender allows you to stop making house payments (forebear) for 3 months, and they will not foreclose on you.
The Fine Print…
If you opt into the Forbearance agreement – read the fine print. Lenders want their money to be paid back. In a 3 month forbearance, you must know what happens to those 3 payments? Are they forgiven or are they tacked on to the end of the loan? If you have 100 payments left and forbear 3 payments, do you now have 103 payments left? If your payment is $2,000 per month, does that mean $6,000 is being tacked on to your loan? Know this BEFORE you agree to it. Read the fine print!
What Happens to Your Credit and Your Ability to Borrow in the Future?
Your credit score is the single most important thing about you when applying for credit. Any “ding” on your credit rating hurts. Its important to know how Forbearance impacts your credit.
A “derogatory statement” on a credit report notifies anyone that evaluates your credit you have serious delinquencies. A Forbearance agreement will be reported as a “Derogatory Statement” to the credit agencies – even though it was mutually agreed upon between you and your lender. This Derogatory statement will be related to your mortgage and it will actually state your mortgage is current – but it remains a derogatory statement on your credit just as well. It should not have an impact on your score – but it cannot be ignored by lenders in the future.
What Does All This Mean…!?
Let’s say you are selling your home right now. A month ago, you opted for a forbearance agreement with your lender. You have sold your home, and the full loan has been paid off, INCLUDING the payments under the Forbearance agreement. The loan is paid. Good for you.
You go house hunting and find a home you want to buy, and when you apply for a loan the new lender evaluates your credit. They see the Forbearance derogatory statement on your credit. They CANNOT lend to you until AFTER a 12-18 month waiting period. This is the unintended consequence of a mortgage forbearance – and the most important one for you to know BEFORE you agree to one.
Do you homework, and as I always recommend – talk to a Realtor who can help you understand and help you plan housing needs. If they don’t know the answer, they will refer you to someone who does. Most importantly, think about the consequences of your actions. Forbearance should be used only as a last resort as it will have untold ripple effects on your future.