Mortgage Forbearance: Will It Help?

The Covid 19 pandemic has forced millions of homeowners across America to become familiar esoteric A/K/A ‘odd’ mortgage terms in order to prevent their finances from falling apart. Record unemployment numbers have led experts to speculate that the nation may be on the precipice of a housing meltdown. While many consumers will be permanently affected by the economic devastation of the Covid 19 pandemic, most will not be. The federal government through its lending programs and legal powers has created programs designed to help borrowers get through this tough time. Modification, deferment and forbearance programs are tools designed by mortgage lenders to assist homeowners avoid foreclosure when they experience short term hardships. Although these programs are designed to help, it is important for homeowners to understand what each program’s pros and cons.

Let’s start with definitions first. There are three terms to explore loan modification, forbearance and payment deferral.

What is a loan modification?

Permanent change to one or more of the terms of a loan.

What is a Forbearance?

With this option, you and your mortgage servicing company (the company that sends your mortgage statements) agree to temporarily suspend or reduce your monthly mortgage payments for a specific period of time. This option lets you deal with your short-term financial problems by giving you time to get back on your feet and bring your mortgage current.

What is a Payment Deferral?

This mortgage relief option moves past-due amounts from missed payments to the end of your loan term so you can keep the same monthly payment while bringing your loan to a current status.

What Do You Need To Do?

All of these programs will require you to go through a qualification process with your mortgage company. Be prepared to fill out a 2 to 7 page application that requests all of your current financial information. You are also likely to be required to provide a letter of explanation, or hardship letter spelling out why you need the assistance. You are also likely to need to provide 2 months worth of bank statements and verification of unemployment, or prove out that you are no longer employed. Be prepared to fill out paperwork, be ready to send paperwork to your mortgage company multiple times and be ready to follow up with lots of phone calls. The programs are available and your mortgage company will process your paperwork, but you will need to be persistent in order to get it done.

These programs are effective but mortgage companies are not designed to deal with consumers individually, they are built to process payments and work through standard forms; if you have a mortgage with Wells Fargo, or JP Morgan you are one of millions. Many, many consumers fail to obtain approval for assistance programs that they qualify for simply because they expect the mortgage company to do the work for them; do not make this mistake, assume that you have better organization than the mortgage company and accept that you have infinitely more motivation to complete the process than the person on the other side of the phone. For the mortgage company representative, your call and your mortgage is just part of their job, for you it is your home.

What are the benefits of a loan modification?

  • Resolve your delinquency status with your mortgage company
  • May reduce your monthly mortgage payments to a more affordable amount
  • Change the original terms of your mortgage permanently, giving you a new start
  • Less damaging to your credit score than a foreclosure
  • Stay in your home and avoid foreclosure

What are the benefits of a forbearance?

  • Lower or temporarily suspend your monthly payment—giving you time to improve your financial situation and get back on your feet
  • Less damaging to your credit score than a foreclosure
  • Stay in your home and avoid foreclosure

What are the benefits of a payment deferral?

  • Bring your mortgage current immediately
  • Keep your monthly payment the same
  • Deferred amount does not accrue interest
  • Less damaging to your credit score than a foreclosure
  • Stay in your home and avoid foreclosure

When should you consider applying for a loan modification? You should apply for a loan modification if you have been late on your mortgage for an extended period of time and you want to try to permanently modify the terms of your existing mortgage. A loan modification is unlikely to significantly reduce your mortgage payment, but a modification is valuable if you are in a situation where you lost income for 6 to 12 months and have fallen behind on your mortgage. Modifications work for consumers that can make full mortgage payments at or near the original payment amount. IF you have equity in your property, a modification may NOT be for you; modifications reset the clock on your mortgage and re amortize (there is interest added to the new extended loan period for the modified mortgage). If you are 6 or more months behind you should consider other options, the cost of ‘re rolling’ a 30 year mortgage is high.

When should you consider applying for a forbearance? You should consider a forbearance if you have a short term disruption to your income, a situation you expect will be resolved within 60 to 120 days. A forbearance is a short term pause on your payments, the mortgage company will specify that for a 60 – 120 day period there will be no payments due but interest continues to accrue. At the end of the forbearance period the totality of the payments for the forbearance period will be due in full, or you will be in default and subject to foreclosure action. A forbearance is a short term cash mitigation option, not a solution for a long term disruption in income.

When should you consider applying for a payment deferral? You should consider applying for a payment deferral option if you have a short term hardship you expect will be resolved within 60 to 120 days and you have depleted your cash reserves. A payment deferral allows a borrower the option to take a small number of missed payments and have them added to the end of the mortgage term, at which point they would be due in full. The deferral option is designed to help homeowners that expect to be unable to make a full payment of paused mortgage payments in a forbearance arrangement.

Call Your Mortgage Company Many borrowers make the mistake of avoiding contact with their mortgage company, the mortgage company is there to walk you through your options. The mortgage company is a neutral third party that will give you the most pertinent information as it relates to your ability to continue to finance your property. Be realistic A mortgage obligation is most likely the biggest financial obligation any of us are likely to have, it is important to be realistic about your financial situation. If your financial condition has deteriorated to the point where the property is no longer affordable, be honest and realistic with yourself. Sit down analyze your finances, make a plan and act as quickly as possible.

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