COVID_19 How a mortgage forbearance works

As the coronavirus continues to worsen and make life difficult for many families, one risk is the loss of income due to being furloughed or temporarily laid off. Here is what you need to know about a forbearance, what it is and how it works.

You are obligated to repay the money that you borrowed on your home mortgage. In exchange for doing so, the lender lends you the money for a certain term. If you don’t make that payment you are in a void of the contract with your lender. Contracts can be changed and or amended with a mutual understanding between both parties. So, the way of forbearance works is the lender is essentially agreeing to allow you to miss a few months of mortgage payments and not foreclose if you have a documentable hardship. So, when you’re hearing about mortgage payment relief options and you’re thinking yourself “I want to take advantage of that”, that is the wrong approach to take. Mortgage forbearance is designed to help families who are experiencing true financial hardship through loss of income as a result of the coronavirus pandemic.

Most mortgage companies are allowing borrowers to skip mortgage payments anywhere from three months, others are at six months and some even going as long as twelve months with no negative credit reporting.

How it works

If your servicer is allowing you to skip three months of mortgage payments and let’s say your mortgage payment is $2,000 a month for illustrative purposes, you will owe the $6k upfront at the end of three months at the same time your normal mortgage payment starts kicking in again. Contrary to popular belief, it is presently not being tacked on to the principal balance of the mortgage. It’s possible that servicers might allow that in the future if the situation worsens. That money is paid and is due in full at the end of the forbearance term. If at the end of the forbearance term a borrower is unable to pay the balance owed, then the lender has the legal right to start the foreclosure proceedings. This is why a forbearance should only be used as a last resort for families experiencing true financial hardship.

Know this- your mortgage company is not in the real estate business they’re in the banking business (interest business) and they want the interest that you’re going to pay on that loan over time. That is their profit motive. the longer you pay on that mortgage over the course of time the more that they are going to retain their annual servicing fee did they get paid for by the investor of your mortgage which is typically Fannie Mae or Freddie Mac. So if you’re experiencing hardship and you are really worried about your ability to make ends meet at the end of the month do yourself a favor and contact your lender directly so they can walk you through on what their individual protocols and guidelines are.

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