Forbearance.  What Exactly Is It?

Forbearance. What Exactly Is It?

GTG Financial, Inc
GTG Financial, Inc
Published on April 22, 2020

Forbearance. What Exactly Is It?

Forbearance is complicated. There isn't a "one size fits all" because the options depend on many factors. Those factors include: 

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  • checkThe type of loan
  • checkThe owner of investor requirements in your mortgage loan
  • checkYour servicer

There are key things to consider with each type of forbearance. You'll want to pay close attention to how your servicer expects you to pay back any missed or reduced mortgage payments.

Paused Payments Option to be Paid During Existing Mortgage

Your servicer allows you to stop making payments for six months, but you must pay everything back at once when your payments are due again. What to consider:

  • You may owe a big bill that comes due all at once.  For example, if your servicer allowed you not to pay your mortgage for six months, at the end of the forbearance period, you may owe all six of your missed mortgage payments in one month.
  • Interest on the paused amounts will continue to accrue until you repay them.

Mortgage Payment Reduction Option

Your servicer allows you to reduce your $1,000 monthly mortgage payment by half for three months. After the three months are over you have one year to pay back the amount of that reduction.  What to consider: 

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  • The amount of the reduction would be spread out over 12 months and added to your mortgage payment once the reduction period is over. This means your monthly mortgage will increase during that one-year period. Using the example above, you would pay $500 for three months and starting on the fourth month you would need to pay $1125.00 ($1,000 + $1500/12) each month for the next 12 months.
  • Interest on any reduced amounts will continue to accrue until you repay them.

Paused Payment Option to be Paid back at End of Mortgage

Your servicer allows you to pause payments for one year, and that amount is repaid by either adding it to the end of your mortgage loan or by you taking out a separate loan. What to consider:  

  • You can extend the term of your loan for some amount of time to pay back the paused payments or take out a separate loan.
  • Extending your loan means the missed payments will be added to the end of your loan. For example, if you were given a twelve-month period where you didn't have to pay your mortgage, you'll have twelve months of payments added on to the date when your loan was supposed to be paid off by.
  • Extending with a separate loan means when your mortgage is due you'll also have to pay off this separate loan. This is like a balloon payment, which is one large payment due at the end of your loan.
  • Interest on the missed amounts will continue to accrue until you repay them.

Forbearance Alternative – Refinance Loan Options

It’s still possible to use your home’s equity to get you through these tough times.  Just as forbearance has restrictions, so does the forbearance avoidance refinance loan.If you have equity, can verify employment and income and have decent credit scores, this is an option you should consider when mapping your path forward.A forbearance avoidance refinance loan can help you realize all of the benefits of short term mortgage relief, with the ability to reduce your rate and payment, take cash out for emergencies, or consolidate high-interest credit card debt into a single low monthly payment.  If you have more than $10k in revolving credit card debt, you’re getting killed in monthly payments and interest charges. Consolidating all of your credit cards into a single monthly payment could save you hundreds a month after skipping one to two payments going through the refinance process could save you hundreds a month. Taking cash out for emergencies is also possible, although getting more difficult.  Expect second lien holders like HELOC programs to become more and more difficult to get.We can help, and give honest advice about whether or not it makes sense to consolidate debt or take cash out at this time.

 Frequently Asked Questions

  • 1How long can my payments be deferred?   Most forbearance programs will defer your payments for a minimum of 90 days, with the ability to extend to 180+ days on a case by case and servicer by servicer basis. FHFA encourages banks to consider forbearance for up to 360 days  So far, we’re not seeing any servicer offering more than 90 to 180 day deferment options. It is up to the individual servicer to either follow or modify this advice.Remember, these payments WILL be paid back.  Depending on the terms of the forbearance agreement, you may need to pay all deferred payments back at once.Please make sure you get all repayment or reinstatement terms in writing to avoid surprises in the future.
  • 2Should I apply for a forbearance?  If you can pay your mortgage, pay your mortgage.If you can't pay your mortgage, or can only pay a portion, contact your mortgage servicer immediately.Don't call your mortgage servicer if you aren't facing an immediate issue. Mortgage servicers are getting a lot of calls and need to first help those who won't be able to pay their mortgage. Check their website first for possible options.Any homeowner who has suffered financial hardship including job loss, furlough, or reduced hours due to Coronavirus and cannot afford to cover their mortgage payment can consider applying for a forbearance period.If there are other expenses that can be eliminated to offset reduced household income, those should be explored first. A house is a homeowner's biggest financial resource and protecting that is essential during economic hardships. 
  • 3What happens when a forbearance period ends?  If your hardship has improved, you will need to bring the loan current, which is known as reinstatement. If you do not have the ability to pay the full amount owed at the time of reinstatement, you will need to work with your loan servicer to establish a repayment plan.If you fail to meet the obligations of the repayment plan, you can apply for a loan modification. A loan modification is often the last resort but eases the financial burden by folding the delinquent payments owed into the loan amount.
  • 4How do I know if my loan is owned or backed by Fannie Mae or Freddie Mac?  Nearly half of the nation's mortgages are owned or backed by Fannie Mae or Freddie Mac.To look up online whether your mortgage is owned or backed by Fannie or Freddie, click these links:                                                                                                                                                                                                                                                               Is my loan backed by Fannie Mae                                                                                               Is my loan backed by Freddie Mac
  • 5Can I refinance my loan after a forbearance? Most servicers will not let you refinance until the terms of the forbearance agreement have been met and all payments are paid as agreed.
  • 6Can applying for forbearance impact my credit? As long as your mortgage payments are made within the outlined time of the forbearance period, there will be no negative impact on credit history.However, homeowners who are only reacting to news headlines and assuming that all mortgage payments are delayed may see a negative impact on their credit if a forbearance period is not applied for and mortgage payments are missed.Additionally, there could be further credit implications on credit score and history that are unforeseen at this time.Because there is a lack of reporting from credit agencies about the potential impact of forbearance’s, homeowners should do everything they can to make their monthly mortgage payments as planned and only apply for a forbearance or deferment as a last resort.
  • 7Will I accrue interest payments or late penalties while in forbearance? Most servicers are not charging interest or late charges on deferred payments and will not report those payments as missed to the credit bureaus.It is important to have this conversation with your servicer and get the terms in writing. 
  • 8What happens after a forbearance? At the end of your forbearance period, all payments not made during the forbearance period will have to be paid back. We realize this will probably be a big financial burden, which is why you'll have a few options for how to handle it:
    • Start a repayment plan  - Over a set number of months, an extra amount will be added to your regular mortgage payment to cover the amount you owe from the forbearance.
    • Pay it as a lump sum  - If possible, the simplest option is to pay back the full amount owed at one time.
    • Loan modification  - If you are unable to pay a lump sum or enter into a repayment plan, we will work with you on a loan modification. This may include an extension at the end of your loan giving you additional months to pay the forbearance amount.

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GTG Financial, Inc
GTG Financial, Inc
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