There’s been a term getting more attention lately. That term is “forbearance” and it’s a process whereby homeowners are allowed to have their monthly mortgage payments suspended. But it’s very important to know exactly what forbearance is, is not, and the impact on the ability to obtain a mortgage in the future. This new term has come to the forefront for many due to the number of those who have been unemployed or otherwise facing a furlough from their employer. When someone doesn’t have the money to make the monthly payment or is looking down the road and sees the possibility of dipping into their savings to make the mortgage payment, taking a monthly payment reprieve sounds like a good plan.
First, lenders do want to work with borrowers when help is needed. Mortgage companies are loathed to foreclose on a property. It’s expensive for them and if there are too many, their own credit lines used to finance home purchases can get more expensive due to the number of defaults. In a worst-case scenario, lenders can even go out of business entirely if foreclosures pile up. Instead, mortgage lenders hire staff to work with borrowers and provide solutions to get them back on track.
The next consideration is the impact of forbearance. A forbearance is an agreed-upon arrangement between the lender and the borrower. For someone who decides to stop making mortgage payments under the guise of forbearance will soon find out the lender isn’t all that keen on that. In fact, the lender will begin to foreclose, typically after two payments in a row have been missed. Instead, forbearance is mutually agreed upon by both parties.
A lender will be agreeable to forbearance if the lender and the borrower both see some light at the end of the tunnel. But at the end of that tunnel, there will be some marked changes to an individual’s credit report.
Let’s look at what a forbearance can actually do. Let’s say an agreement is reached that forbearance is going into place for six months. Payments are no longer needed each month and the agreement avoids a potential foreclosure. Let’s also say the total monthly payments, including taxes and insurance is $2,500 per month. After six months, the forbearance ends, and payments must resume keeping in good standing with the mortgage company. What happens after six months? It’s just a bit more than starting up mortgage payments again. Those mortgage payments have been piling up and after six months there’s a bill due to the tune of $15,000. That $15,000 isn’t forgiven, it’s due.
In the meantime, the credit report will start showing those late payments piling up. Forbearance doesn’t mean the credit won’t be touched; it will certainly be. These late payments can also tell a future lender that a foreclosure was imminent and even though a forbearance was agreed to, the late payments won’t disappear. If there’s anything a lender pays more attention to with regard to monthly payments, it’s the payments made toward the mortgage that matters most.
If you or someone you know has been thinking or talking about forbearance, while it’s a temporary reprieve, it can have a negative impact on a credit rating well into the future.