What You Need to Know About Mortgage Forbearance During COVID-19

• Author: Jeffrey Simmons
• Posted: 2024-07-31

If you are one of the millions of Americans who have been hit by COVID-19, you may be having trouble making your mortgage payment on the first of the month. Many people have requested mortgage forbearance from their lender during this time. Financial institutions are trying to work with borrowers to an extent right now. However, forbearance is not a complete break from your obligations under your mortgage. For many, they have no other choice but to avail themselves of this option. However, there are some benefits and drawbacks that you need to know before you make the call to your lender.

You Will Not Run the Risk of Foreclosure

Even though most lenders and servicers cannot initiate or execute foreclosures at the current time, this protection may run out in the near-future. Even still, if you have to miss payments, it is better to do so with the acquiescence of your lender as opposed to simply not paying your mortgage. Forbearance will take you out of jeopardy so long as the period lasts.

Your Payment Obligation Does Not Go Away

When your mortgage is in forbearance, your debt will continue to pile up during this time. This means that you will owe more interest that continues to accrue to the amount that you owe. The government orders that have addressed the inability to pay for housing have made clear that people must still pay their mortgages eventually. In other words, forbearance is not considered forgiveness for you. Your debt will continue to increase and could present a challenge when you are able to begin paying in the future. The added interest will raise your mortgage payment in the future. This may be difficult since you will already be recovering from a difficult financial time.

Catching Up Can Be Hard

The terms of forbearance may not be the same when you are dealing with different banks. There is no uniformity as to whether the bank simply prorates your future payments or is able to charge you a lump sum once the forbearance ends. In a best-case scenario, the lender could extend the life of the loan to keep you from having to make payments that you cannot afford. However, the terms of the forbearance are up to the lender. You may not be in control of the situation that you face once your forbearance concludes. Of course, every forbearance is for a period of time and will end eventually.

Your Future Ability to Refinance Can Be Harmed

Forbearance is not a black mark against your credit. It cannot be used to lower your credit score since it is not treated as a failure to pay what you owe. However, that does not mean that it leaves no trace on your credit history. Even though it is not considered to be derogatory, it is still something that future lenders are able to notice about your credit history. If you are trying to get a new loan in the future, forbearance may become a factor in whether you are successfully able to receive credit. Forbearance may not be the sole reason why you are rejected, but it can tip the scales against you in the event that your application is a close call for the bank.

You May Have Other Options

Banks often do not want you to default on your mortgage. Especially now, they do not want to take possession of a large number of homes in the face of a real estate market that could collapse. Thus, you may not need to avail yourself of the terms that they offer for forbearance. You may have some leeway to negotiate the terms of your forbearance. This depends on the lender who holds your mortgage. Smaller banks and credit unions may have more flexibility than large banks to give you better terms. Right now, your bank wants you to be whole on your mortgage because default is the last thing that they want. It never hurts to at least ask the questions about getting better terms. Given the fact that there is legislation to protect borrowers right now, your bank does not want you behind with limited ability to foreclose on your loan.

If you are having trouble paying your mortgage, you lose nothing by calling the lender to discuss the options that you may have.