The term “forbearance” has gotten a bit of attention over the past few weeks. Unfortunately, homeowners seek out a forbearance agreement without fully knowing all the implications, as well as understanding exactly what a forbearance is and is not. The term has come to the forefront lately as the number of the unemployed mounts and homeowners may have trouble making the mortgage payment down the road unless jobs start to open up. If looking at taking money out of a savings account to make the mortgage payment doesn’t sound like a good idea then the prospect of taking a “mortgage payment holiday” sounds like a pretty good idea, right?
A forbearance agreement is an agreement between the lender and the borrower. Many mistakenly think that mortgage lenders are quick to foreclose on a property, but the opposite is true. Lenders hate to foreclose and use the legal tool only as a last resort. A foreclosure has implications with the lender as well. Too many foreclosures and soon the lender’s own source of funds begins to get more expensive and can be so much that the lender is forced to go out of business. No, lenders want to work things out with the borrower and avoid a foreclosure if at all possible. Lenders have employees whose job is to work with borrowers to avoid a foreclosure through different measures. And a forbearance is just one of those tools.
It’s extremely important to know the impact of such an action. First, a borrower can’t independently decide to take a mortgage holiday and call it a forbearance. That’s not what happens. Missing monthly payments starts the foreclosure process. The lender needs to know when someone is or may soon be having financial issues. That’s where the agreement part comes into play. The homeowner provides details of the situation and can provide a way out of the situation, showing there is light at the end of the tunnel.
This agreement will allow the homeowner to stop making payments for a specified period of time and resume at a later date, say in six months. During that time frame however, the payments don’t just magically go away…they’re due at the end of the forbearance period. If the regular mortgage payment is $2,500 and the forbearance period is for six months, at the end of six months there’s a $15,000 shortfall that must be made up.
As it relates to the credit report, not only will late mortgage payments start appearing, there will also be a note stating the mortgage is in forbearance. This notation will cause credit scores to drop even further. In addition to that, most lenders won’t approve a new mortgage whether it’s for a purchase or a refinance for at least 12 months after a forbearance has been filed. Further, that notation will still be on the credit report long after the forbearance was resolved.
When someone is experiencing some challenging times as it relates to employment and finances, it can be difficult to make a clear-headed decision. With a forbearance, it might seem like an easy way out of a bad situation. But a forbearance has far more implications other than getting a payment reprieve. If you or someone you know is struggling and a forbearance option comes into the picture, let’s talk about your options before any decision is made.