Considering Mortgage Forbearance on Your Northern Virginia Home?
Are you considering mortgage forbearance on your Northern Virginia home? While mortgage forbearance can be a lifesaver from some, in most of cases opting for forbearance is not a good idea. If you can make your payments, continue to do. The first thing to understand about mortgage forbearance is that it is not free money. Forbearance does not mean that you skip 6 months of payments, rather it means that you owe 6 months’ worth of payments at the end of your forbearance term—plus interest.
In general, according to Consumer Finance, “Forbearance is when your mortgage servicer, that’s the company that sends your mortgage statement and manages your loan, or lender allows you to pause or reduce your payments for a limited period of time. Forbearance does not erase what you owe. You’ll have to repay any missed or reduced payments in the future.” Again, while some homeowners may have no other alternatives, in general you want to avoid this route if at all possible.
It is also helpful to know that forbearance is not the same as deferment. While both act as postponement of loan payments, the major difference is that deferment allows borrowers to repay the money over time or add it to the end of their loan period, while forbearance generally results in a lump sum balloon payment at the end of the forbearance term. Owing a balloon payment at the end of forbearance generally offsets any logical reasoning to postpone payment because if you could not pay the mortgage during the forbearance term, what is the likelihood that could pay a lump sum at the end? Generally the odds are fairly low, and in many cases leads to loan default. In fact, mortgage forbearance was a driving force behind the housing market crash in 2007.
Does Mortgage Forbearance Affect Your Credit Score?
So, does mortgage forbearance affect your credit score? What you should also know about forbearance is, while it not reported to the credit bureaus as “default” your forbearance is still reported to the credit bureaus and will display on your credit report. While this will not directly lower your credit score, the resulting factors might. For example, when mortgage forbearance appears on your credit report, your existing creditors may opt to lower your available credit, thereby changing your debt-to-income ratio, which leads to a lower credit score. Thus, while the results are indirect, the impact is the same, your score is lower. And of course, a lower credit score means it becomes more difficult to get a low-interest loan. Additionally, your chances of being able to refinance your loan during a forbearance are slim.
Mortgage Forbearance Under the CARES Act
Now that you know the realities of forbearance, there have been some provisions under the CARES ACT, largely in response to what happened in 2007. Under the CARES Act borrowers facing economic hardship because of COVID-19 can get mortgage forbearance for up to a year. During this time, lenders cannot foreclose on your property. If you have a government-backed mortgage, there are now multiple repayment options available to homeowners once the forbearance ends. That is the good news. The bad news is it will still indirectly affect your credit and likely make other things you may try to do more challenging. For example, yes you can sell your home during forbearance but getting a loan on a new home may be more difficult. Even renting may be more difficult, especially if your debt-to-income ratio is affected.
In conclusion, there is one more thing to consider. The CARES Act was put together very quickly in response to COVID-19 and many of the details of the particular programs still lack clarity. Information is not as readily available as it should. Thus, you should approach mortgage forbearance with extreme caution and get as much information as possible before pursing that as an option. Understandably, you make be limited and constrained by time and money, but just be sure you fully understand what you are getting in to.
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