What is Forbearance and Why Should You Care?
As of April 19th, the Mortgage Banker Association reports that 7% of mortgages are now in forbearance which equates to approximately 3.5 million loans.
Forbearance is an agreement between a lender and a borrower to delay or suspend mortgage payments until the end of the agreed upon forbearance period. The recently enacted CARES Act stipulates that a borrower whose mortgage is backed by either the government or the Government-Sponsored Enterprises (Fannie Mae and Freddie Mac) who is experiencing a COVID-19-related hardship can request and must be granted forbearance of up to 180 days.
What is unclear is the impact that forbearance will have on future buyers. We know that a buyer who is currently in forbearance with their primary residence, second home or investment properties will be ineligible for a loan.
While borrowers should not experience any decline in credit scores from missed mortgage payments, there may be consequences further down the line. For example, in order to be eligible for a new home loan after forbearance — whether a refinance or purchase — buyers will need to re-establish themselves as a credible borrower.
“Most lenders would want to see you having made up the forbearance,” says Rocke Andrews, President of the National Association of Mortgage Brokers. In addition, Andrew’s notes, lenders will probably want to see 12 months’ worth of on-time payments following the forbearance.
That being said, it’s still not clear what the exact overall impact will be on future buyers. At a minimum, borrowers should be aware that nothing comes without a cost and forbearance is not loan forgiveness. Pulling the lever on forbearance shouldn’t be taken lightly.
Here are general guidelines for you to keep in mind should your clients contact you with questions:
- If you can pay your mortgage in full, you should continue to pay your mortgage.
- If you can only pay a portion of your mortgage, you should contact your mortgage loan servicer to find out if there are other mortgage relief options for you.
- If you can’t pay your mortgage due to COVID-19 related hardship, contact your loan servicer to review the available options. Be sure to request a written agreement that outlines the terms and review them carefully. Be aware that loan servicers are barred from adding any fees, penalties or interest charges beyond the amounts scheduled if the borrower made timely payments.