Forbearance to Foreclosure...A Foregone Conclusion?

While millions of people are taking advantage of historic low-interest rates and they're headed to the closing table as fast as they can; millions of others are going from forbearance to foreclosure before they even know what hit them.  Desperate times DO call for desperate measures, but it's a good idea to understand the small print BEFORE you accept the help.  It sounded pretty good, right?  Who wouldn't like a 3-month break on the mortgage payments?  Even people NOT in need of desperate measures took advantage of the opportunity to skip a few payments, that's for sure!  Unfortunately, when things sound too good to be true they usually ARE too good to be true, and now almost 5 million people are about to get a serious reality check they never banked on.

   Requesting Mortgage Forbearance: Be Careful | Greenbush Financial Planning

 

Simply put, forbearance is an agreement between a lender and a mortgagee to skip payments; however, the forbearance landscape is not simple or straightforward and can be treacherous to a homeowner that is uninformed

Forbearance  Is represented as a solution to an out-of-work homeowners dilemma that will provide some “shelter from the storm,” but this may not be the case at all. Some Homeowners get confused about Forbearance, thinking it means ‘Deferment’. Although your payments can be deferred, a lender does not have to agree to it.  Deferment is discretionary and it is based on the homeowner’s credit, payment history, and other factors.

Deferment – Allows the mortgage payments to be “deferred” or rolled forward for a period, or at the end of the loan. There are a number of options and variations that are solely dependent upon the loan servicer, the homeowner’s payment history, credit rating, and term of the deferment -  in the end, the deferment is at the discretion of the lender or loan servicer.

The CARES Act (Coronavirus Aid, Relief and Economic Security), recently enacted by Congress and signed by President Trump, allocated $2 trillion to help individuals, families, and businesses pull through the economic crisis resulting from the COVID-19 virus and the shutdown it caused.  Included in this Act were provisions that provided expanded flexibility to federally subsidized loan programs, such as FHA and VA loans, that allowed a forbearance to be offered to individuals where there was a demonstrated need with more generous payback options. 

Typically, forbearance is granted to an eligible individual for a specific period of time, (usually 90 days) and at the end, the accumulated skipped payment (principal and interest) is due to be paid in a lump sum.  I'm not sure how it's possible to make a lump sum payment if it isn't possible to make a monthly payment, but that's the way they're structured.   Again, the federally subsidized lenders can offer terms much like the deferment; however, this is NOT TRUE for private lending institutions – they ARE NOT required to comply with the CARES Act conditions. So, a homeowner that goes into forbearance thinking they are getting some “shelter from the storm” may actually create a situation where foreclosure is imminent if they are not able to make the “balloon” payment at the end of the term. If a person is having trouble making their mortgage payment today, they should very carefully assess their ability to pay in the future or they will sail into a much more difficult storm in only a few months.

Forbearance is not nearly as attractive...or as simple as it appears to be on the surface. Remember, even though the principle and interest payments might be waived for a specified time, that doesn't necessarily mean that the Homeowners Association (HOA) dues, escrow for taxes, homeowners insurance, or private mortgage insurance (PMI) are waived.  These expenses may still be owed monthly and if they aren't paid it could result in foreclosure too.  Most people don't know that the HOA has the power to foreclose over delinquent dues and (most of the time) they take precedence over the mortgage!   Lastly, many mortgages contain a condition that the lender can accelerate the note in the event the homeowner’s insurance lapses for a certain period which, despite a forbearance, could result in the beginning of foreclosure action.

The best position anyone can have is NO mortgage at all so that when tragedy strikes the family home is never in jeopardy.  It doesn't take making extra payments or living on rice and beans to pay off a mortgage...all it takes is a plan...a financial GPS...a roadmap to get you there by beating the bank at their own interest game.

If you like the idea of never having to negotiate a payment plan no matter what's going on in the world, Living Larger has a solution that will blow your mind.  In the meantime, read the small print and remember - there's no such thing as a free lunch...ESPECIALLY when you're dealing with consumer debt.

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