Forbearance is NOT Forgiveness

You may remember just a few short years ago when the CARES Act came about due to the pandemic.  One of the facets of the CARES Act was the ability for home owners with a mortgage to enter into Forbearance.  You may have taken that option at the time, and you may still be wondering how that may affect you as our world is recovering from the pandemic.  If you were not affected during the height of the pandemic, but you are now facing financial hardships – you may be wondering if a forbearance is an option for you.  Here are some important things to know about mortgage forbearance.

Let’s start at the beginning…..What is forbearance?

Forbearance is when you and your mortgage company agree to temporarily suspend or reduce monthly mortgage payments for a specific period of time. Forbearance lets you deal with your short-term financial problems by giving you time to get back on your feet and bring your mortgage current. The missed payment amounts are not forgiven, they will have to be repaid in one of several ways.  Let’s review some of the options for repayment after forbearance.

Payment in full after forbearance

In this type of repayment plan, the unpaid amounts the accrued during forbearance are due immediately after forbearance. The forbearance timeframe is usually 6 months to 1 year.  This option allows you to pause your monthly mortgage payments on a temporary basis. However, you’ll need to pay everything back all at once when the forbearance period ends. You may consider this similar to a balloon payment. Unless you can pay all amounts due back after the forbearance period, this was likely not the best option for you.

Payment reduction

This forbearance option allows your mortgage loan servicer to reduce your monthly payment amount for a specific period of time…. usually 12 months.  Once the arrangement comes to an end, you will repay those “skipped” portions of your payments over 12 months.   Here is an example of how that might work:  Your current payment is $1500 per month. Your lender agrees to accept $1200 per month for the next 12 months (saving you $300 per month for a short period of time).  At the end of the 12-months you will be required to pay back the shortfall ($300 x 12 = $3600).  Since the bank will require you to repay that, the next 12 months your house payment will be $1800 per month (regular payment plus the shortfall).  It is very important to be sure that you can afford to make the post-reduction payments before agreeing to this forbearance option.

Paused payments

This option is the most common type of forbearance agreement that was used during the Pandemic.  In this option, your mortgage servicer/lender/bank allows you to pause making mortgage payments for up to one year. Those delayed payments are added onto the end of your loan and extend your repayment time frame. Since this is likely the best option for a successful forbearance repayment, most people expected this to be the option given to them.  However, make sure to have a conversation with your lender/servicer to be sure you understand how your specific forbearance works.  Don’t just assume this is the way it will work. Call and verify the details.


Other things to consider

If you are facing a financial hardship (for any reason), reach out to your mortgage bank, mortgage lender or mortgage servicer to explain your hardship. Be prepared to answer questions about your specific financial situation.  They will likely ask about your income, expenses, and assets (like the money you have in savings).

While the pandemic isn’t as big of a concern today, if you’re experiencing a hardship due to implications from COVID-19, you may still want to ask for a forbearance (it was offered to everyone during the height of the pandemic). For private mortgage loans (those not owned or backed by the government) you can ask your bank about available hardship options. It may also be helpful to research whether your state has specific mortgage relief provisions in advance so you’ll be familiar with your rights.

You should also ask the lender/servicer how their process goes when the forbearance period ends. At the end of your forbearance period, will you need to make up delayed payments immediately? Will skipped payments be applied to the end of your loan? It’s critical to gather these details upfront so you’ll know exactly what to expect.

Take great notes.  Make sure to document everything. If your lender or servicer grants you a special payment accommodation, ask for a copy of the arrangement in writing. Store your documents in a safe place.

Be aware of your credit score.  By entering into a forbearance agreement with your mortgage lender this “could” affect your credit in a negative way, but it may not.  A portion of the CARES Act amended the Fair Credit Reporting Act, which could impact your specific situation