Though most cities in the U.S. are beginning to reopen after their strictest Stay-At-Home orders, both our local and national economies continue to carry a tremendous load of stress that has weighed on them since Coronavirus 'hit' our nation. Many people are facing financial hardship and unemployment, looking for solutions to this trying situation in which they find themselves. As of June 1st, just over 4.2 million homeowners are now in forbearance plans, according to the Mortgage Bankers Association. This equates to 8.46% of servicers' total loans.
What Is Forbearance?
Forbearance is a temporary postponement or reduction of mortgage payments, allowing a borrower to suspend their mortgage payments temporarily because of a financial hardship. The terms of a forbearance agreement are negotiated between the borrower and the lender. Federally backed and some privately owned mortgage companies have been offering various forms of relief amid the Covid-19 pandemic.
Should You Apply?
Where do you find yourself ? It goes without saying, there's a scale of financial hardship and suffering. If you're thinking about mortgage forbearance, we suspect you'd likely place yourself somewhere on the moderate to severe end of that scale. Or maybe not. We've talked to some investors and private homeowners who have explored this option, just because it currently exists and because they would like to have the cash on hand a buffer. If you're considering contacting your bank to request forbearance on your mortgage, there are a few things to consider.
Likelihood of Missing a Payment?
Take a step back and look at the big picture. Is it likely another month will go by and you will miss a payment? What about two months? Or three? Late fees tied to mortgages are no joke, and they can add up quickly! Be honest with yourself and decide whether this is a needed relief for you and your family, or if you're just trying to take advantage of a system that has been put in place.
The Coronavirus Aid, Relief and Economic Security Act claims to protect your credit score if filing for forbearance under current circumstances. However, there have been numerous reports of borrowers whose credit scores have been negatively affected by the postponed payments they've received. This may depend on whether your loan is federally backed (Fannie Mae & Freddie Mac) or privately owned. There may be other factors involved as well, such as the way your servicer is handling and reporting the forbearance.
On the flip side, missing a payment or going into foreclosure can obliterate your credit score and may have a much more severe impact on your future borrowing ability. Judge your risk/reward carefully in relation to credit scores.
Unfortunately we are surrounded by less than ethical people who are increasingly likely to take advantage of others during a period of unease. If you do decide to apply for forbearance, make sure you are approaching industry professionals you know and trust rather than being lured in by an offer that is too good to be true.
Refinancing may not be an option for those in dire situations, but before you jump on the forbearance train, explore your refinancing options. Interest rates have been fluctuating sporadically, yet they remain at historic lows (hovering around 3.175-3.375% for a 30-year fixed rate mortgage with 0-0.25 points). Lenders would prefer to lock you in at a better rate, rather than giving you a deferral.
Contact your loan servicer or your mortgage broker to find out what to do next.
As always, thanks for reading ;) Be well and be smart about your finances.
To learn more about this topic, Credit Karma has a great post available: Coronavirus: Mortgage debt relief programs for homeowners.
Federal Housing Finance Agency