If you're having trouble paying your mortgage during the pandemic, don't seek out a forbearance before reading this.
What is a forbearance? Put simply, a forbearance is an agreement in which your mortgage provider allows you to delay your payments for a certain period - but it's not the same as mortgage forgiveness. For example, suppose you're in the restaurant industry with a $1,000-a-month payment, and you're just not able to make those payments for the next four months.
So what happens to the $4,000 you deferred? Well, different things can happen to it: The bank can add it to the back of your loan, meaning your loan period will be extended by four months. You can also get what's called a 'silent second', which means that the deferred $4,000 will be kept on the side, and whenever you sell or refinance the property, you'll be expected to pay it.
Here are some pros and cons of forbearance:
Cons: You still owe the deferred amount. This is something that people need to consider, especially those who have FHA or VA loans, where you pay your taxes and insurance together with your mortgage. In those cases, your property taxes and insurance aren't getting paid, and since there's no law or regulation that states what will happen to that portion of your payment, the county might demand that you pay your property taxes, and your insurance company might do the same. If the government isn't stepping in for that portion of your payment, you're still liable. It's critical that you speak with your lender to see how forbearance would affect your situation.
Pros: Forbearance will help you get through these challenging times. Plus, there won't be any late payments for the deferral period. Not to mention that your lender won't be reporting your forbearance to your credit bureau, which means your credit won't be penalized.
Mind you, we're not talking about every single mortgage out there - only the ones governed by Fannie Mae, Freddie Mac, and other government-backed entities.
If you've been affected by the pandemic and need assistance, here are the steps you need to take:
- Call the number on the bottom on your mortgage statement and request forbearance. They won't implement this help automatically.
- Fill them in on your situation and why you cannot make your mortgage payment.
- Make sure you get the details of the arrangement in writing.
I do want to reemphasize that forbearance is not equal to forgiveness, and that's why I recommend that if you still have a job and can pay your mortgage, you should. Don't jump on the bandwagon of forbearance simply because it seems easy in the short term. A forbearance isn't a way of saving money - it's a can of worms. That money is non-interest-bearing, so you won't generate any interest on the money you don't pay.
If you need help or have any questions, don't hesitate to reach out to us. We're here to help you.