With unemployment rates soaring many homeowners are worried that they may not be able to pay their next mortgage payment. As part of the government stimulus package many banks are able to offer what is called mortgage forbearance. Under forbearance your bank can allow you to temporarily lower or pause your mortgage payment, but interest does continue to accrue during this period. You must understand that these payments are not free or forgiven. You will have to pay your payment reduction or paused payments later.
One good thing that is different from the mortgage forbearance offers back in the crisis of 2008 is you don’t have to prove hardship. All you have to do is call up your loan servicer and attest to the fact that you need some assistance. This would be a perfect time to ask questions. Mortgage forbearance is very complicated and is based on many things such as the type of loan. Here are some important things to remember when speaking to your servicer:
- Be patient and vigilant. Banks are inundated with calls at the moment. You may be on hold for a while trying to reach someone. You may consider calling during off hours to try and shorten your wait time.
- How often do you need to renew? As of now under the current order you may qualify for up to a year of forbearance. Your servicer may require that you call every 90 days to renew.
- Understand your repayment options. Are you expected to pay a lump sum after 90 days or is it possible to move these payments to the end of your mortgage? Another option might be spreading out your deferral in future payments over a period of time.
- How does this affect your credit? Ask if this forbearance will show up as a notification on your credit score. The current order protects your credit score from taking a hit, but a notification on your report stating that you are in mortgage forbearance may have an impact on future loans, especially if you are planning a major purchase soon.
- Is a loan modification a better option? If your servicer offers to modify your loan for a lower payment, keep in mind that home loan modifications will result in a drop in your credit score. If you are looking to purchase a new home in a year or two this may not be the best option for you.
- How does this affect your current escrow for your home owners insurance, HOA or condo fees, and taxes? The current plan does not address this and you may want to make sure that your servicer will continue to pay these items for you for the length of your forbearance. If you do not escrow your homeowners insurance, taxes, HOA or condo fees remember that you are still responsible for these payments as usual.
- Does interest continue to accrue on the balance? Most likely interest will continue to accrue on your principle balance. It might be worth asking how this affects your future mortgage payoff.
If you are able to continue to make your payments by dipping into your savings, with all things considered that may be your best option. If there is absolutely no way you can make your payments, forbearance may be the best choice especially if it will help you avoid foreclosure. I hope that I was able to shed some light on how forbearance works and this post provides you more knowledge to help you make an informed decision during these uncertain times.