The share of mortgage loans in forbearance rose to 8.53 percent by the end of May according to the Mortgage Bankers Association, which the organization says is equivalent to nearly 4.3 million homeowners who weren’t able to make payments in full.
With so many Americans being faced with financial hardships during these uncertain times, here is what industry experts say is most important to know about mortgage forbearance.
What is forbearance?
“A forbearance on a mortgage gives payment relief to borrowers during financial hardship. There are many mortgage servicers, which are the companies that manage your monthly mortgage payments, out there and each will have their own process for applying for a forbearance,” realtor Kristina Morales told FOX Business. “It can be as simple as applying within your online portal and attesting to financial hardship.”
Though, she made it a point to clarify that forbearance is a temporary option and is not the same as forgiveness, which means “it must be paid back at some point.” She also added that forbearance can provide short-term liquidity during an emergency, so borrowers can stay afloat.
Are there any cons to forbearance?
“One negative impact may be the inability to refinance and/or obtain another mortgage within 12 months of the last missed payment,” Morales explained. “It is imperative to ask all these questions before you decide to proceed with a forbearance.”
On the flip side, lenders and servicers are not allowed to negatively report the past due amounts to the credit bureaus under the CARES Act.
How does forbearance impact your FICO Score?
Putting a mortgage under forbearance does not negatively impact a FICO Score, the credit-risk model agency’s Vice President Tom Quinn told FOX Business.
“This holds true with all versions of the FICO Scores. Keep in mind, your prior history of payments will continue to be considered in the calculation of your FICO Scores,” he shared. “So too will other information that your lender regularly updates on the account, such as current balance and payment status.”
Additionally, he suggests borrowers ask their lenders how the company intends to report mortgages under forbearance and whether the payment status of these accounts will be reported as “current” or “paid as agreed.”
What to do before you ask for forbearance?
The first thing a borrower who is considering forbearance should do is check if their mortgage is federally-backed, according to Head Attorney Leslie Tayne at Tayne Law Group. If the mortgage is indeed federally-backed, it qualifies for forbearance under the CARES Act.
“While the CARES Act requires federal loan servicers to make a forbearance plan available to borrowers for up to 180 days, extended up to 12 months by request; other lenders are offering forbearance programs as well,” Tayne told FOX Business. “While individuals can contact lenders and navigate the process alone, another option available is to speak to a housing counselor — many provide advice at no charge and can ‘translate’ or simplify the forbearance agreement to the loan holder.”
Moreover, Tayne recommends having all documentation of household income and expenses ready before contacting a lender about forbearance terms. In her own words, “Know how much you can afford before making an agreement to avoid further financial stress down the road.”
Tayne also warns that if a lender has already reported a late payment to credit bureaus, the lender “can continue reporting the account as ‘30 days late’ during the relief period.”
How to ask for forbearance?
When a borrower is ready to contact their lender about mortgage forbearance, communicating the reality of household finances is the key.
“Explain the circumstances honestly. There are many unknowns in today’s pandemic. For example, when will everyone return to work, and will the company you work for survive? The unknowns are scary,” Consumer Lending Director Rick Bennett at UMB Bank told FOX Business. “We will work with the facts that we do know. If the borrower does know how long they will have reduced pay or be without income, then the solution can be tailored accordingly.”
He added that “most creditors base their strategies and solutions on guidance from regulatory agencies.”
In Bennett’s line of work, non-federally insured mortgages can very well offer more flexibility in finding an equitable solution.
Additional legal tips
From a legal perspective, Tayne advises borrowers to ask their servicer’s phone representative if they have the authority to set a forbearance agreement. If the representative doesn’t have the authority, it’s best to ask for a manager who does to “avoid the headache of being transferred around and repeating yourself.”
Tayne also recommends borrowers to request forbearance terms and agreements in writing from a mortgage servicer as documented proof that an agreement took place.
“Taking accurate notes and documenting what was asked and what the lender said during phone calls, as well as who you were speaking with is beneficial if you need to reference terms of the agreement or address potential miscommunication with the lender,” she added.