UNDERSTANDING MORTGAGE FORBEARANCE 

WHAT IS MORTGAGE FORBEARANCE?

Forbearance provides a short-term deferment for mortgage payments. If you’re experiencing any difficulty making your mortgage payments, especially because of COVID-19, emergency forbearance may be a good option for you.  As you’ll see below, there are several considerations to keep in mind.

FORBEARANCE OPTIONS

Forbearance options may vary depending on the type of loan that you have.  For example, if you have a federally backed loan (think Fannie Mae, Freddie Mac, or FHA), the CARES Act has provisions that will allow you to temporarily suspend payments if you’re experiencing financial hardship due to COVID-19 specifically.  You don’t have to necessarily be infected with COVID-19 for this provision to apply to you.  If you have been impacted in any way, whether it be the loss of a job, reduced pay, etc., then the CARES Act provision may help you.

Some banks are initially offering a 3-month deferment option for mortgages.  With the CARES Act, you have up to 180 days to defer the payments.  In addition, you can request an extension of up to another 180 days.  Essentially, you can get your mortgage payments deferred up to 1 year.

CONTACT YOUR SERVICER

Your servicer is the entity that sends you your monthly statements.  It is important to note that the servicer may be different from the entity that owns the loan.  Thankfully, the paperwork to obtain a forbearance currently is very minimal at this time.  I recommend creating an online account with your servicer if you don’t already have one.  As there are millions of people out of work currently, servicers are incredibly overwhelmed and often don’t have the capacity to speak with people live.  As a result, they have made the online process very simple. You will often find the forbearance option right on the servicer’s homepage along with the different time frames.  Many people are automatically approved without even providing documentation and going through a formal process.

MORTGAGE PAYMENTS WHILE IN FORBEARANCE

You may be in a position where you obtained a forbearance, but can still make some form of payment.  For example, you may still be employed, but experiencing a 25% pay reduction during COVID-19.  Your monthly mortgage payment may be $2500, which you can’t afford, but can pay up to $1500 instead.  For the most part, once you accept a forbearance, the servicer does not accept any mortgage payments.  So what should you do with the $1500 in this example that you can afford to pay?  Generally speaking, most people pay their property taxes and homeowners insurance via their mortgage payment.  Think about it like this: your mortgage lender or servicer takes 1/12 of whatever your property taxes and homeowners insurance cost is, and puts that money into an escrow account. Now, every time the property taxes, school taxes, and homeowners insurance are due, the servicer or lender gets the bill and pays it for you with the money from your escrow account. Well, what happens with those additional bills when your mortgage loan is in forbearance?  As you are no longer making your monthly payments, there’s no longer money being put into your escrow account and you end up with a deficit.  As the bank still owns the loan, they do not want to default on the taxes, insurance, etc.  So, they end up making these payments for you, despite there not being enough money in your escrow account.  When the forbearance is over, not only will you have to start making your mortgage payments again, but you will also have make up for the escrow deficit. Here is what I have been advising my clients to do whenever possible: contact your servicer and explain that while you can’t afford to pay your entire mortgage at this time, you’re able to continue paying into your escrow account.  This will enable the servicer to continue paying your property taxes and homeowners insurance, without creating a deficit to your escrow account.  Once forbearance is over, you can likely just resume payments as normal, assuming the servicer allows those deferred payments to be added to the back end of your loan with no penalties or fees (which is often the case).

In the event that your servicer does not allow escrow payments to be made while your mortgage is in forbearance, ask if they will allow you to pay directly to the homeowners insurance and property taxes.  If this is also not an option, be sure to set the $1500 (in this example) aside, so that once the forbearance is over you have savings to start paying back the loan, taxes, and insurance fees.

LUMP SUM

While many banks are trying to make the forbearance process as simple and inexpensive for people as possible, there are some exceptions.  I have seen some banks that permit a forbearance for let’s say 3 months.  At the end of those 3 months, not only do you have to start making payments again, but the bank expects you to pay a lump sum for the full 3 months right off the bat!  Now, if you’re struggling to make payments as it is, it will likely be very difficult for you to come up with 3 whole months’ worth of payments all at once. Be sure to fully understand the terms of the forbearance before finalizing anything.

WHEN SHOULD YOU SPEAK WITH A CERTIFIED FINANCIAL PLANNER™ PROFESSIONAL?

Now!  Some people are under the assumption that you have to be rich to have a financial planner.  There are others who believe they only need to speak with a financial planner if they’re having a serious financial issue.  Neither is true.  Regardless of your economic situation, a financial planner can help you in truly significant ways.  Whether you have a lot of money, a little bit of money, a lot of debt, no debt, unsure about your employer’s 401K options, or any other money related issue, a financial planner can help you navigate through all of these things and put you on the road to achieving your financial goals.  Even if you feel very stable with your finances, a financial planner can help you sustain the progress you’ve already made.

WHERE TO GO FROM HERE?

Listen to the On My Way To Wealth Podcast for additional information and specific examples.           Want to receive my e-book with free money tips for Gen Xers? Click this link:  www.buildabetterfinancialfuture.com  Consult with a Certified Financial Planner™ professional as he/she can provide you with the knowledge and expertise critical to help you Build A Better Financial Future!

THANK YOU!

As always, thank you for checking out my podcast and blog post!  If there are any topics you would like to learn more about, or if you would like to schedule a free call with me, please email me at Luis@onmywaytowealth.com!  All of my podcast episodes can be found at www.onmywaytowealth.com and on all major podcasting platforms.  For my business site, please be sure to check out www.buildabetterfinancialfuture.com.  I look forward to helping you Build A Better Financial Future!