The recent COVID-19 crisis has been a constantly evolving issue in the financial services industry including mortgage banking. Much discussion has shifted from lenders being at capacity to offer low rates to how the FEDs buyback program and Mortgage Forbearance are hurting interest rates and obtaining credit for housing. Below are some things to consider before taking a Mortgage Forbearance.
Please Note: Homeowners who need access to a forbearance should be able to obtain it. This summary is meant to encourage Homeowners to consider their options prior taking a forbearance. A mortgage forbearance can have serious financial implications if considerations are not reviewed responsibly.
What is a Mortgage Forbearance?
A mortgage forbearance is a kind of payment deferral where your mortgage payment is put on hold until a later date. When that later date occurs, the Homeowner is responsible for resuming their mortgage payment. It can help stall the process of foreclosure on the home so the Homeowner can attempt to get back on their feet financially, allowing them to keep their home.
Recent action by the Federal Housing Finance Authority (FHFA) is requiring mortgage servicers to allow mortgage forbearance for those borrowers affected by COVID-19 issues such as job loss, loss of income, contracting the virus, death of the primary wage earner due to COVID-19, etc. You do not have to had contracted the virus to attest for a forbearance. Additional information is available here from FHFA
Will a forbearance affect my credit or will I be charged late fees?
The FHFA has instructed mortgage servicers that consumers’ credit should not be affected if a forbearance is granted and that late fees or penalties are to be waived in that event. However, we have already seen credit reports reflecting “forbearance” under a borrower’s mortgage loan and they were marked 30 days late on their payment. Banks are reporting and allowed to show “Forbearance” under the mortgage account if actively in this status. While this consumer could make a case for the forbearance and late mark to be removed, they will most likely go through many challenges before it is removed IF the servicer is willing to comply.
Can I get a new mortgage loan if I have a Forbearance?
Not really and likely No for now. This includes refinances and is evolving day-by-day. Banks may introduce overlays, or additional requirements in the future, before you can successfully close on a new home loan if you have a forbearance. For now, banks are NOT allowing new home loans with a current Forbearance showing on credit. In addition, it is possible that as more Homeowners use Forbearance, Fannie Mae, Freddie Mac, and HUD may update their guidelines to include seasoning periods or specific requirements for borrowers who have a Forbearance on their credit.
Will it be more difficult to get a mortgage loan if I do NOT have a Forbearance?
During times of recession, lending guidelines (in general) condense to ensure qualified individuals can make their mortgage payments on time. The ability to repay a mortgage loan focuses on income, credit, and assets of a borrower. All three areas must meet qualifying guidelines. Obtaining a mortgage loan depends on the borrower circumstances. If a borrower has a good stable work history of receiving the same income consistently and pays on time, the borrower should be able to qualify. Again, this depends on the bigger picture the borrower is presenting for a home loan.
What does a forbearance payment plan look like?
- Lump Sum – Some plans may require the full lump sum of deferred payments due all at once. If your total mortgage payment is $2,000 per month (includes PITI) and you defer for 6 months, you will have $12,000 due at the end of the deferral. Remember, the servicer is paying out the interest due to investors and paying out the Property Tax and Insurance premiums when due. The servicer wants to be whole again, especially if they are borrowing funds to meet these obligations. This is the most common and likely plan the servicers will use.
- End of the Loan – Other plans may put the balance owed at end of your loan term, being added to the principle owed on your home loan. You risk losing any appreciation gains with this option, especially if you just purchased your home. This option is more like a loan modification. Anticipate needing to show hardship for this type of plan. For now, how this plays out is still yet to be determined.
What if I want to hold my mortgage payments for 6 months and save the money?
Many Homeowners have considered holding their mortgage payments aside for the forbearance time to build up a reserve fund in case they lose their income. Every situation is a case-by-case as there is no litmus test to say one thing or another. However, consider that your interest rate on your checking or saving account is next to nothing compared to the interest you pay on your mortgage. The money sitting in saving accounts that would have been made for the mortgage payment does not earn enough to have the money sitting there.
A Homeowner who may lose their income and wants to have some relief so they can cover everyday expenses like groceries or utilities can make a good case for the need to have forbearance. But, there are still other solutions.
What are some other solutions to a forbearance?
- 401k & IRA Accounts – The IRS has put special waivers in place for withdrawing from your 401k or IRA for COVID -19 hardships such as waiving the 10% penalty on IRAs and allowing for additional loans or higher loan amounts against a 401k. Speak with your HR representative about your 401k options or your Financial Advisor about IRA options
- Refinance your existing mortgage – It may seem an obvious solution given my profession, but a rate/term refinance or cash out refinance can add to your monthly cash flow and reserves if you are still employed. Even if you are furloughed during this time, but have savings, you could be eligible for a home loan and refinance. Many of my clients have used this solution.
- Skipping 2 months’ payments – Since you are refinancing your home loan, the payoff of the old loan serves as your mortgage payment. Instead of making your payment, we can work so your loan closes before it is due. Interest must be earned on a home loan before it can be collected. So, say you are closing this month, April. You let the payoff serve as your April payment, May must be earned interest by the bank (no payment due), your first payment is due June 1st. Plus, you can take a small amount of cash out when doing a rate/term refinance (usually less than a percentage of the loan, no more than $2,000). If you have a mortgage payment of $2,000, skipping 2 payments and taking the potential max cash back, you have $6,000 added to your saving account. Finally, don’t forget any added monthly savings you gained from your refinance.
- Cash out Refinance/Debt Consolidation – The Economic Impact Payments (EIP) are great for helping consumers and Homeowners. I pray people choose to save the funds or pay their obligations. But remember, this is one-time. Using your home’s equity and taking cash out on a refinance can potentially help you save hundreds per month by reducing or eliminating unsecured consumer debt. That is a savings that adds hundreds every month to your cash flow.
The news and guidelines continue to evolve during this unprecedented time. Despite the abrupt slow down in the economy, housing is expected to remain strong and values are expected to continue appreciating. The demand for housing is strong all around. Interest rates will fluctuate between now and the next few months. But they are remaining at all time lows. There will be more opportunity for housing, especially with lower rates on the horizon.