Last updated on June 25th, 2021 at 05:26 pm

Last Updated on June 25, 2021 by

So you read or were told about the federal government bailout for COVID. Not only did you probably receive a series of checks from the government, but you may also have taken advantage of other freebies, or at least you thought they were. One of the programs that were developed was the mortgage forbearance program. There is a fancy name for it but no one remembers (CARES ACT) it, let’s just call it what it is, a delayed payment program.

Forbearance permitted initial 180 delay in mortgage payments

The program permitted a delay of 180 days then another 180 days. There may yet be more extensions, keep checking with this website produced by HUD. To distill this program down for you. Anyone with a pulse (not literally) could ask for and must be granted forbearance. The regulations were specific about no requirements other than stating that you needed help. The program stated that no notes from parents, doctors, schools, or documentation were required to delay payments.

Well, all things must come to an end and the forbearance program has done just that (until the next iteration). As they say, it’s time to pay the piper. If you are one of the very few (in my opinion) who thought you would never have to make those payments up, here is the word. You do.

Forbearance can be a trap for some. If you used the program and did not need it, you may be saddled with debt that you have to work out with the lender. if that debt is added to your home, it will erode your equity. A good article on this topic can be found by clicking here

All of the principal and the interest which is higher now because you have not made payments for months. The program no doubt benefited many people but some took advantage of it.

Government pushed lenders to inform customers about Forebearance

I have spoken to several people who were contacted by their lender through the mail or on a call or even email about the program. Apparently, the federal government put a full-court press on financial companies to be sure everyone knew that they could delay payment of their mortgages. It seemed to most that I have spoken to that the companies almost forced it on them. This not only included mortgages but even auto payments.

Credit reporting companies and lenders could not report anyone for being late if they had been part of the forbearance program. This however did not prevent lenders from reporting the forbearance and indicating the months of skipped payments. You see, creditors who report every month on the activity of their loans have to indicate something. The credit reporting companies, therefore, are showing on your credit report that you did not make the payments. They are also not indicating that your payments were late because in fact they were never made according to negotiated terms.

Prospective lenders can see you missed payments

Prospective lenders can see that you have had financial problems and this is where the rub comes in. You have decided to buy a new house and have to sell the existing house. You are going to obtain a new loan for the new house. The prospective creditor pulls your credit report and sees that you have an outstanding debt to the current lender and that you have not made payments in the past. This tells them that until you can show a pattern of consistent monthly payments, you are not worthy of a new loan. So your plans to buy a new house must be put on hold for a while.

Lenders may want a short history of resumed payments

Some lenders will tell you that you need to make at least X monthly payments before they will consider lending to you. There is one other problem. that debt you accumulated in unpaid interest which is the majority of the mortgage payment (generally), must be paid at some point.

Your debt to income ratio may be affected depending upon how much you owe to your current lender and how the future lender looks at that debt. If you are carrying too much debt which may include unpaid mortgage debt, you may not qualify. This assumes that the automated process of qualifying you passes on this. More often you will have to write a letter and go through a tougher qualification process.

You used Forbearance, are you still creditworthy?

There is still that lingering doubt on the part of the lender that you may not be sufficiently stable financially to make the loan. The question is why did you take the forbearance? Were you unemployed? or just wanted some money to remodel your kitchen? This is not to say that every lender will go through all of these questions with you but some will.

If you can sell your home and rent for a while then buy the next home, you will have cleared the debt from the forbearance and should be given credit for making rental payments. When you go to buy a new home the new lender will see the months of forbearance but a paid-off note.

What do you do now?

So what do you do? Start making regular mortgage payments immediately (assuming you can). Arrange to pay off the debt. Don’t wait, do it now. You can roll the debt on the back of the loan. This will add to the interest you have to pay but few people ever keep their mortgages for 30 years. The appreciation of your home should help you offset this debt. The process may require a refinance with the same lender who will be able to manage the fact that you failed to make your mortgage payments for months at a time. Without a doubt, the terms of the original mortgage will have to change to permit the loan to get back on track.

The arrangement made by your current lender may require a higher monthly payment to pay off the debt e.g. $10 per month over xx months etc. There are actually several ways that you can deal with the debt you have accumulated. Most lenders will work with you to reach a solution that works for both parties.

The U.S. government Consumer Protection Bureau has a good article about how to pay off the forebearance, click here for more.

Start by getting your credit in good shape

If you want to buy a new home, you should start by making sure your other credit issues are intact. Pay off credit cards at least up to no more than 10% of the available credit. Clear up any other debt such as car payments that were not made. If you want a good interest rate, get your score above 700. Contact a mortgage broker rather than a bank. They have many more options to work with. Give them all of the information including a credit report that you have recently run. Ask them to assess where you are without running your credit particularly when you are still working out the forbearance issue.

As I mentioned above, it may take several months of on-time payments to get your credit back on track. The score is important but when buying a home the lender looks at more than just the score, they look at your actual report. The simplest and most important thing that I can tell you is to pay your obligations on time, all of the time. Your credit score will determine over decades how much less you will have to pay for everything from mortgage interest to your home insurance policy and auto insurance.

Be prepared to tell the lender why you needed Forebearance

Be prepared to have a solid story for the reason you needed the forbearance. The prospective lender will want to be sure you are beyond the issues that put you in a position where you could not pay your mortgage payment. You may be asked to provide documentation to support your reasons. Keep in mind that if you were on enhanced unemployment and earned most of what you would have on a job, a lender would wonder why you did not make your payments. Considering also the free money the government sent to everyone, some people who took forbearance will have some explaining to do.

Realtors often run into a brick wall when trying to get younger people qualified to buy a home. Why? Because it seems that when people are young, they don’t have a clue how to manage credit. Their parents and schools just did not talk about credit. When a young person gets their first credit card there are choices to be made. Spend no more than the limit, pay on time, and don’t run a balance. Some let friends use their cards, others move and don’t get the bill so without a bill there must be no payment. Keep in mind if you are reading this and you are in your 20’s that one day you may want to buy a house, a car, or even rent a car at the airport. You need those credit cards. Credit is part of our life now.

Do you want to pay 25% interest?

Do you want to pay 25% interest or pay 6%? It’s a simple decision. Honor your obligations and the cost of credit will be far lower and it will be there when you need it most. The worst financial mistake you can make is to skip paying your mortgage payment. Lenders view non-payment of a mortgage to be far worse than skipping a car payment. Finally, if you have not already come to this conclusion let me help you. There is no free money. Someone had to provide the money. Someone will have to pay the bills. Always, always read the fine print.

Read more about your credit at my blog site RetireCoast.com. The RetireCoast.com website has a variety of articles about your credit. From budgeting to how much credit you need, it’s all there.

Note: The U.S. Government is still in the process of pushing out programs to “assist” people with their debt. This article may become dated quickly. Do not use the contents of this article as the only source of information about this topic. There are several sources for more information. Start with the Department of Housing and Urban Development on the government side. Contact a loan broker or portfolio lender bank for current information about their programs. What you learn today may be outdated in a month. Speak to the experts before you make your final decision on anything contained in this article. We are not responsible for your actions, you are.

Thank you for visiting our blog and website. Logan-Anderson, Gulf Coastal Realtors works with individuals with excellent credit and the “credit challenged”. Please contact us, we can refer you to a loan broker and give you an idea of how much home you may be qualified to purchase. Call us at 228-215-0031. Select 1 for Sean and 2 for Bill or email us.