Forbearance Does Not Equal Forgiveness
In an age of uncertainty like today, it can be difficult to know if the information that we are being told is trustworthy or complete. Each day we are seeing new programs and possible solutions to our problems. It can be tempting to rush important decision making.
If paying your mortgage is going to become a struggle and you are thinking of Forbearance as a solution, make sure you know all of the terms before you proceed. Some might assume that Forbearance is Forgiveness, but that is not the case. You will still owe any unpaid payments back in one way or another.
Forbearance does not mean Forgiveness. It’s important to understand what it is that you are signing. Let’s do some mortgage forbearance math. John and Mary have a mortgage. It’s currently at $2,500 per month. John loses his job and gets laid off from work. John hears all of the news about forbearance and how if you’ve been negatively impacted by COVID-19 that banks have to work with you. Excited, John calls the mortgage servicer, inquires about the forbearance he is entitled to. He’s so excited because in just one phone call, for now, he doesn’t have to pay his mortgage for six months.
So this is where the craziness comes in. Now seven months later, John is back at work, and of course he couldn’t save any additional money when he was out of work during the forbearance period. The forbearance time period of six months is now up and the servicer sends John and Mary their bill. They are both stunned because the bill shows that John and Mary now owe $15,000 plus $2,500, and it’s all due right now on the seventh month. So $17,500 in total is due now. In a state of shock John calls the servicer and asks, “Why?” Servicer, “That’s the six months of forbearance, “$2,500 times six plus the current month’s mortgage “totaling $17,500.” John, “Well obviously, I haven’t been working “and I don’t have that kind of money. “I can’t pay that. “Is there anything I can do, can we renegotiate?” Servicer, “Sure, we will spread out the $15,000 over 12 months.” John, “Great, how does that work?” Servicer, “That will be $3,750 per month “for the next 12 months.” “What! “I don’t understand, why?” Servicer, “$15,000 divided by 12 months “equals an additional monthly payment of $1,250 “added to your regular monthly payment of $2,500, “so the payment due would be $3,750 for the next 12 months.” John, “I can’t afford that. “Can I refinance?” Servicer, “No, because the loan went into forbearance, “now you have an unsatisfactory “recent mortgage payment history “in the eyes of Fannie Mae & Freddie Mac’s “current underwriting approval guidelines.”
To sum it up, forbearance is not forgiveness. You still have to pay it back. Whether it is at the end of a few months, or if it’s at the end of the lifetime of the loan, it will have to be paid back. We need to make sure that we are correctly giving out information regarding forbearance. There’s been a lot of misinformation out there. Homeowners think that they should just do forbearance, and that they won’t have to pay it back and that there will be no consequences. Please make sure you understand what you’re getting into. It’s very similar to 2008 when people were short selling and didn’t realize before they passed the Mortgage Forgiveness Debt Relief Act, that if you short sold your property, you would be taxed on the amount of debt forgiven. Just remember, there’s no such thing as free right now when it comes to forbearance. Keep in mind during a forbearance, mortgage servicers are still paying the debt to the company ultimately holding the loan. The mortgage servicers cannot sustain this prolonged period of fronting the money during the forbearance period and will need to seek restitution somehow.
Unlike the Mortgage Crisis in 2008, most people have substantial equity in their home. At some point the money owed will become due. Mortgage interest rates will likely be low for the majority of 2020. Don’t allow media headlines or bad information to cloud your judgement and take you down the wrong path and take away your ability to refinance or worse cause you to lose your home. Think back to the last housing crisis and remember how dangerous it is to take advice from people who are not qualified to provide it, including the media, google or social media. They aren’t going to come and bail you out or lend you the money you’ll need when you need it. Know what you’re getting yourself into before you sign. Talk to the right people, ask the right questions, read the fine print.
While forbearance might be the only option for some, it should not be pursued unless absolutely necessary. Other options may be offered by the mortgage servicer, such as deferring the entire amount due to the back of the loan, but assumptions should not be made without written clarification. Bottom line, know what you are agreeing to and work with a very experienced realtor and lender who know how to protect you and give you accurate sound advice. Please reach out to Sandra and me for any advice at all. Let us help you navigate these tough times or guide you in the right direction. We appreciate you and together, we will all get through this.
Need help coming up with the best plan of action for your home? Give us a call or email us anytime to go over your options! We can help you find the path that make the most sense for you.
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