Forbearance does not mean forgiveness.
There is a lot of talk about lenders giving forbearance so that you do not have to pay your mortgage payment. It is so important that you understand what it is that you are signing.
Let’s do some mortgage forbearance math. Let’s take John and Cindy. They have a mortgage and it’s currently at $2,500 per month. John gets laid off of work and hears all of the news about the forbearance and how, if you have been negatively impacted by COVID-19, the banks have to work with you. Excited, John calls the mortgage servicer and inquires about the forbearance he is entitled to. He’s so excited because just in one phone call, he does not have to pay his mortgage for six months.
But this is where the craziness comes in. Seven months later, the forbearance timeframe of six months is now up. John is back at work. Of course, he wasn’t able to save any additional money when he was out of work, but at least now he has a regular paycheck. The servicer sends John and Cindy their bill. They nearly faint, because the bill shows that now John and Cindy owe $17,500 and it is all due right now in the seventh month. John is shocked and calls his servicer and asks why.
Here’s what the servicer says. “Well, John, that’s basic math. The six months of forbearance, $2,500 times six, plus the current monthly payment of $2,500 equals $17,500, which is due now.” John says, “Well, obviously, I have not been working and I don’t have that kind of money. I can’t pay that. Is there anything we can do? Can we renegotiate?” Servicer says, “Sure. We will spread that $15,000 out over 12 months.” John is like, “Oh great, thank you. How does that work?” The servicer says, “Well, that will make your monthly payment $3,750 a month for the next 12 months.” John’s like, “What?! I don’t understand; why?” The servicer says, “Well, again, John, it’s basic math. $15,000 divided by 12 months equals $1,250 a month, plus your normal monthly payment of $2,500 equals $3,750 for the next 12 months.” John is exasperated. He says, “I can’t afford that. Can I refinance?.”
To which the servicer says no because the loan went into forbearance and now you have an unsatisfactory recent mortgage payment which, as of right now, is not forgiven by Fannie Mae or Freddie Mac’s current approval guidelines. To sum all of this 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. Please make sure that you understand what you’re getting into. Just remember, there’s no such thing as free as of right now when it comes to forbearance. At some point, the money owed will become due. While forbearance might be the only option for some, it should not be pursued unless absolutely necessary.
Don’t allow media headlines or bad information to cloud your judgment and take you down the wrong path and disqualify you from a possible refinance later or, worse, cost you to lose your home. Know what you’re getting yourself into before you sign. Speak with the right people, ask the right questions, and please read the fine print.
Other options may be offered by the mortgage servicer, such as deferring the entire payment due to the back of the loan, but assumptions should not be made without written clarification.
Please feel free to reach out to me and my team for any advice. Let us help you navigate these tough times or guide you in the right direction. Please stay healthy and keep safe!