In recent months, Americans who have struggled to pay their bills amid a wave of job losses from the coronavirus pandemic have sought mortgage forbearance options. In fact, according to the Mortgage Bankers Association, nearly 4.3 million homeowners were in forbearance plans during the first week of June.
But as states start to open up and people head back to work, the question becomes, how does taking part in a forbearance program affect borrowers in the future?
What is mortgage forbearance?
It’s first important to understand how forbearance works. Forbearance is when your mortgage servicer or lender allows you to temporarily pay your mortgage at a lower payment or pause paying your mortgage for a specified amount of time.
According to the Consumer Financial Protection Bureau (CFPB), “forbearance can help you deal with a hardship, such as, if your home was damaged in a flood, you had an illness or injury that increased your healthcare costs, or you lost your job,” However, the bureau explains, “forbearance does not erase the amount you owe on your mortgage,” adding, “you will have to repay any missed or reduced payments.”
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, individuals with federally backed mortgages who are experiencing financial hardship due to COVID-19 can request a forbearance period by contacting their mortgage servicer. Federally backed mortgages include those guaranteed or insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Department of Agriculture (USDA), or loans purchased or securitized by Fannie Mae and Freddie Mac.
According to the CFPB those with a federally backed home loan have a right to request a forbearance for up to 180 days. You also have the right to request one extension up to 180 days, and the CFPB says there are no additional fees, penalties or additional interest (beyond scheduled amounts).
The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, is also providing payment forbearance to borrowers impacted by COVID-19 for up to 12 months.
Does it affect a borrower’s credit?
In “normal” times, a mortgage forbearance is recorded on a borrower’s credit report and would likely have negative consequences on their score. However, as part of the CARES Act, mortgage accounts in forbearance as a result of COVID-19 cannot be reported negatively to the credit bureaus.
“If a borrower is utilizing a mortgage forbearance program, it will be noted at the top of the credit report, but it won’t impact the actual score,” said Wayne Lacy, branch manager with Cherry Creek Mortgage Company. “I’ve seen credit reports of borrowers who are in forbearance, but still have scores above 800.”
Will it affect future borrowing?
While forbearance doesn’t affect credit scores, it’s still considered a financial hardship, and initially, that meant a 12-month waiting period before a borrower could apply for a new mortgage.
But Lacy reminds us that we’re in unprecedented times, and guidelines surrounding mortgage relief have been changing from week-to-week, sometimes even day-to-day.
“Recently, Fannie and Freddie announced that they’re not considering a COVID-19 related forbearance as ‘a normal historical delinquency.’” he said. “And instead of the 12-month rule, borrowers can now refinance their current loan or apply for a new mortgage after three months.”
Lacy says that according to new guidelines, a borrower who is in forbearance is eligible for a new loan if all payments are brought current, and the borrower has made at least three consecutive timely mortgage payments after exiting forbearance. The funds used to bring the borrower current need to be documented and the source of funds must be what is normally accepted – gift money, savings, 401K disbursem*nt, etc.
While forbearance can be a good source of financial relief for people who have been impacted by the pandemic, experts say if you're still working and can afford to make mortgage payments, you should do so.
For those who are truly struggling to make payments due to COVID-19, Lacy says applying for forbearance should be considered, regardless of whether it impacts your future borrowing ability.
“If you start missing payments and haven’t entered a forbearance program, that will definitely impact your credit score and you likely won’t qualify for a new mortgage anytime soon,” he said. “But before you make any decisions, it’s best to consult your lender to make sure you’re getting up-to-date information and sound advice.”
For a list of local professionals, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.
