Understanding Forbearance During The Coronavirus Pandemic

BREAKING NEWS: Understanding Forbearance During The Coronavirus Pandemic
Understanding Forbearance
Gustan Cho Associates

Understanding Forbearance for homeowners who have been financially impacted by the coronavirus pandemic is very important.

  • Included in the $2.2 trillion coronavirus pandemic that was recently signed into law by President Trump is a law that allows forbearance to any homeowner affected by the coronavirus pandemic crisis
  • Homeowners with federally backed loans are eligible for forbearance for six months but can be extended up to one year
  • FHA, VA, USDA, Conventional loans are federally backed mortgages
  • However, many homeowners do not know exactly what mortgage forbearance is
  • Understanding Forbearance is important for mortgage borrowers
  • Forbearance is not forgiveness
  • Lenders allow borrowers to miss their mortgage payments and let interest accrue until they are financially able to pay
  • Many borrowers confuse forbearance versus loan modification
  • Over 26 million Americans have filed unemployment claims in the past 4 weeks
  • The once solid strong U.S. economy has been turned upside down due to the pandemic
  • Unemployment rates are expected to soar to greater levels than we had during the Great Depression
  • The government included the forbearance law for homeowners to avoid a flood of foreclosures by homeowners

In this breaking news article, we will discuss and cover Understanding Forbearance During The Coronavirus Pandemic.

Understanding Forbearance Mortgage Process By Lenders

Forbearance is when a lender will let you missed monthly mortgage payments for a specific period of time.

  • During the forbearance period, the interest still accrues
  • Once the forbearance term is over, all missed mortgage payments are due at once
  • However, lenders can set up a period where the missed payments can be spread out
  • The spread-out missed payments need to be paid along with the regular mortgage payments plus escrow payments
  • The coronavirus pandemic has devastated the U.S. economy
  • Over 26 million Americans have filed unemployment claims over the past four weeks
  • Millions of small businesses have closed
  • Many of the closed businesses may never reopen while those fortunate enough to reopen, it will take time for these businesses to return to normalcy
  • Mortgage forbearance is not mortgage payment forgiveness
  • The missed payments need to be paid back
  • Lenders normally want the full missed payments once the forbearance term expires. But how can borrowers come up with that lump sum at once
  • Depending on the lender, the missed payments can be worked out over a certain period of time
  • Borrowers need to realize that the mortgage payments after forbearance will be higher than the regularly scheduled payment
  • This is because the payment plan on the missed payment will be on top of the regularly scheduled mortgage payment
  • This may create a problem if the borrower’s income is not the same as it was prior to the start of the forbearance

There are instances where the borrower will make less money than they did prior to the forbearance. If the mortgage payments after the forbearance period are too much, the borrower can request a loan modification. A loan modification is a restructuring of the current loan.

Understanding Forbearance And How It Works

Industry experts estimate an estimated 25% of homeowners will have trouble making their mortgage payments due to the coronavirus pandemic impact on American wage earners and businesses.

  • Some homeowners fully understanding forbearance still want to plug away with making their monthly scheduled mortgage payments without seeking forbearance
  • However, nobody knows the actual damage of the pandemic and when how the economy will recover
  • Dozens of states are still in a stay at home order by their state governors
  • Many state governors issued a state of emergency for all non-essential businesses and workers to stay at home
  • There are workers who have lost their jobs permanently
  • Others may take extreme wage reductions when the economy opens
  • Many closed businesses may never reopen
  • Most economists are predicting the coronavirus recession is going to be worse than the 2008 financial crisis and so is the unemployment rate
  • Bankruptcy and foreclosure rates are expected to skyrocket
  • The spread by COVID-19 has left many homeowners scrambling to figure out how to pay their mortgages
  • Many homeowners thought it was a gift from God when they found out about the forbearance mortgage program until they researched it more

The forbearance system is flawed. How are homeowners expected to come up with a large sum of missed payments at once when the term is over. Even if the aggregate missed payments are spread out over a year. The interest is accrued and not forgiven. 

Understanding Forbearance Repayment Terms After Expiration

Lenders of federally-backed mortgage loans are required to offer financially distressed homeowners forbearance if they have an economic impact due to the economy.

  • These are FHA, VA, USDA, Fannie Mae, Freddie Mac mortgages
  • Fannie Mae, Freddie Mac, and FHA are never required to come up with one full sum of missed payments after the forbearance term is over
  • Borrowers can spread-out the missed payments, accrued interests, and escrow shortage
  • It yet remains to be seen if the federal government will offer future aid for borrower’s missed payments. The missed payments are not reported to credit bureaus

The key question is how borrowers will repay the missed payments after the forbearance term is over because it needs to get repaid. Analysts expect 25% of all homeowners may take advantage of the government forbearance mortgage program.

Loan Modification Versus Forbearance

What is the difference between loan modification and forbearance

If homeowners have long term financial effects after forbearance and cannot meet the minimum payment due on both the monthly scheduled mortgage payments and/or covering the missed payment, they may qualify for a loan modification. A loan modification can forgive part of the missed mortgage payments. A loan modification can also restructure the original loan so the borrower can have lower monthly payments. The ability to repay is key when structuring a loan modification. For example, if the borrower has lost his or her high paying job due to the pandemic and got a new job with a 30% or more wage reduction, the borrower may have a hard time making their mortgage payments. Lenders do not want a borrower’s property. Lenders rather take a loss and do a loan modification and make sure the borrower can make their mortgage payments. Lenders will want borrower’s financial information when structuring a loan modification. The missed payments can be added to the back of the loan term. Lenders can also reduce the interest rate to make the monthly payments lower. The lender can also discount the loan balance to make the payments affordable. The lender can also extend the term of the loan. Borrowers need to be employed to qualify for a loan modification.

For more information about this topic and/or other mortgage-related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com.

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