As Michigan and the rest of the country begins to reopen, unfortunately, many people’s financial problems will not go away. Some will find they have permanently lost their jobs and may have to make significant changes to get by. There are other people who have more of a temporary cash flow problem and need a short-term fix. For those in this category, the recently passed CARES Act and the new rule regarding forbearance on federally backed mortgages provides an option that you may want to consider. Like most things in life, the option is not perfect, but it can be a lifeline for those in financial need.
Let’s start with the term forbearance and what it actually means. Forbearance on your mortgage is like hitting the pause button. When you receive a forbearance on your mortgage it means your payments are temporarily suspended. In other words, you don’t have to make your mortgage payment. Under the CARES Act, the law provides for a 180-day initial forbearance and the possibility of an extension for another 180 days. It is important to understand that a forbearance is not forgiveness. You will still need to repay the money; however, it does give you a temporary reprieve in making your payments.
Forbearance on mortgages has been with us for quite a while. However, it is not easy to get and generally requires a substantial amount of paperwork. What has changed under the CARES Act is the qualification requirements. All you need to do is notify your mortgage service company that you are experiencing a pandemic-related financial hardship and you will qualify. You won’t need to resubmit additional documentation. The one caveat is that this form of forbearance only applies to federally backed mortgages. The most common federally backed mortgages are through federal agencies such as Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veteran Affairs (VA). If you have one of these types of mortgages, which most people do, you qualify for the new rules regarding forbearance. If this program could be of help to you and your family, I recommend contacting your mortgage servicer to get the process going as soon as possible. You do not have to provide paperwork, and in many situations, the loan forbearance is approved immediately on the phone.
Although, a loan forbearance does provide you temporary relief, one thing you need to do before you accept the forbearance is ensure you have an agreement with your service provider regarding your repayment options. There are different ways to repay the forbearance amount and you don’t want to be in the position where you have to make an unexpected balloon payment for all the missed payments. There is nothing in the CARES Act that requires a borrower to repay the loan in a lump sum and therefore, you can negotiate repayment options. Before you accept the forbearance, make sure you fully understand the repayment terms. In fact, make sure your forbearance agreement is in writing.
Many of you may be asking, if you accept a forbearance agreement will it hurt your credit rating. The short answer is no. If your mortgage account was current at the time of your forbearance, it will remain current throughout the forbearance period. On the other hand, if for example you were 30 days delinquent on your mortgage prior to receiving the forbearance, you will remain 30 days delinquent during the period of the forbearance. That being said, even though a forbearance is not going to affect your credit scores, lenders will be able to see that you were in forbearance and that may or may not be a factor in deciding to give you a future loan.
As I mentioned, the new law applies to federally backed mortgages. However, if you do not have a federally backed mortgage and you are experiencing financial difficulty, you can contact your mortgage provider to seek a forbearance or even a loan modification; however, the process is more cumbersome.
A mortgage loan forbearance can be effective to resolve short-term financial difficulties. It is an option that makes sense for many people; however, for it to be a successful option for you, not only do you have to concentrate on the short-term relief it gives you, but also, and maybe more importantly, how you are going to repay the money once the forbearance ends.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.