Be careful going into forbearance

Well, times are definitely changing and one of the biggest challenges to buying a new home or refinancing a mortgage is forbearance. The federal government has allowed borrowers to do mortgage payment deferrals, but that comes at a cost. If you have forbearance on your mortgage right now or if you’re thinking about going into forbearance here is what you need to know…

A mortgage forbearance allows you to skip mortgage payments. Forbearance on mortgages has been around for years however it’s recently come into play as the pandemic has taken shape over the course of the last 12 months.

The forbearance is meant to be relief from mortgage payments if you’ve had some sort of financial hardship brought on by the pandemic. The inherent problem with the forbearances is that no documentation is required, you can literally call your mortgage servicer and request to do a deferment not make a mortgage payment for a matter of months come and not have any dings on your credit. This was not meant to take advantage of the situation but was rolled for families experiencing financial hardship as a result of the pandemic.

You’re going to have a tough time buying a house or refinancing the mortgage if you have a forbearance happening at the same time. You must have 3 consecutive payments on the new balance, or bring the loan out of forbearance by paying off the balance so, for example, your mortgage payment is $3000 a month you skip 3 months of payments $9000 goes on to your principal balance, make 3 months of payments and then you are eligible for mortgage financing again. It doesn’t matter how good your credit is, how much equity you have in the property, how good your job or income is, or how good your debt-to-income ratio is this is a hard requirement. Or you would have to bring in the $9000 to make your mortgage current with your lender.

If you don’t have the cash, cash-out refinancing to pay off the mortgage balance including the amount of the forbearance will not work the same rules above apply. So why is this important? Well if you go to refinance the balance in the future after making 3 months of payments your mortgage balance will be higher which means if you refinance your payments will be higher because you’re financing a higher principal balance because your loan negatively amortized.

The above can be avoided by getting a mortgage that you can actually afford in the 1st place so for example you want to best numbers for purchasing or refinancing a house where you have very few consumer payments such as credit cards car payments student loan payments a healthy mortgage payment in relationship income and more importantly money in the bank, ideally 6-8 months of mortgage payments as the broader foundation of good financial planning surrounding the household budget.

Doing this will allow you to weather financial storms when they are present you can avoid having to take extreme measures like doing the forbearance on your mortgage. This is all why it’s important to work with a quality loan officer, not the internet loan officer that that works at a call center and is offering you a 0.125% lower rate which is minuscule in relation to the bigger broader picture of a sound mortgage sound financial advice and aligning yourself with a healthy budget perhaps with the guidance of an experienced loan officer that understands personal household finance.

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