About 7% of mortgage loans in the US have entered forbearance. Many homeowners are feeling the effects on their income of COVID-19 and naturally, want to ensure that their home, which is often times there biggest asset, stays protected.
Many have heard that banks are working with mortgagees who have been affected by COVID-19. It’s important that if you do need help from your lender, you know what you’re asking for and how it will affect you in the future.
The difference between forbearance and deferment.
Let’s say Jon calls his mortgage lender after a reduction in income due to COVID-19. He asks the lender what they can do to help him with his monthly mortgage payments as he cannot pay them right now. The lender says “No problem! We can forbear your mortgage payments for 3 months!” Jon thinks this is fantastic and chooses this option and goes about life.
Three months later, Jon receives a mortgage statement for the next months payment PLUS the 3 months he skipped. Jon calls his mortgage lender and says “I can’t afford this!” So the lender offers to forbear another 3 months of payments and Jon agrees.
The 3 months goes by, Jon receives a statement for his next monthly mortgage payment PLUS the 6 months he skipped. He calls his mortgage lender and says “I can’t pay this!” So the mortgage lender says “Sorry, there is nothing we can do. Please pay or we will have to start the foreclosure process”. Jon says “Can I refinance?” The bank says no, because he is in forbearance, Jon is forced to sell his home, but while the home is on the market he must sell at a discount to sell quickly and is behind on payments while waiting for the transaction to close therefore receiving negative marks on his credit.
If Jon had asked for deferment, Jon would not pay his payment for 3 months, and the payments would be added on to the end of his loan. Virtually taking a pause in his mortgage loan payment.
Ideally, deferment is better for Jon than forbearance.
However, there are caveats to both.
When you obtain a mortgage loan, you create a promise to pay the bank monthly. The bank expects you to uphold this promise regardless of the circumstances. Banks are under no obligation to work with you should you not be able to make your payment.
There is still no certainty about how a lender will observe these options in the future. Let’s say Jon receives a 3 months forbearance and is lucky that after 3 months, his income returns to normal and now he can not only begin to pay his mortgage payment again, but is also able to repay the 3 months he missed. His loan is back in good standing with the bank. One year down the road, Jon decides he wants to sell his home and purchase a new home with financing. There is no certainty that a lender will allow a new loan after seeing that Jon missed 3 months of payments, and if so, he may have to obtain alternative financing or very expensive financing because banks may identify this forbearance process as an essential default of debt and a breach of their initial promise to pay and therefore, a higher risk.
Forbearance or deferment should be a very last option if possible. If you have no other options, aim for deferment. However, whether you must go through deferment or forbearance be sure to ask your lender the following questions:
How will these missed payments report on my credit?
What is the re-payment plan? When do I have to repay these payments?
What if I am unable to make these payments per the new payment plan?
Will you allow a refinance while in or after forbearance?
Are there any other options?
If you are already past these options and are struggling to make your payments, there are additional options before entering the foreclosure process. If you would like to know more, please reach out for a private and discreet consultation. lauren@californianestates.com or 424-250-0046
Lauren has been a licensed Realtor in the state of California for nearly a decade. She began her career helping distressed homeowners during the Recession and is now a top luxury agent in Los Angeles.