For Some, Mortgage Forbearance Could Make It Harder To Get a New Loan in the Future
Homeowners who request relief from their payments on their federally funded mortgages amid the coronavirus pandemic won't be penalized for it in the long run, the federal government announced on Tuesday.
Earlier in March, the federal government assured homeowners with these loans that they wouldn't lose their homes, incur fees, or have their credit scores damaged if they couldn't make their payments—as long as they entered a lender-approved forbearance program. Typically, forbearances are doled out in three-month chunks for up to 12 months.
But that forbearance has been showing up on these borrowers' credit reports, making it nearly impossible for many of them to refinance their mortgages into lower monthly payments or qualify for a loan on a new property, say if they get a job in another city. Traditionally, owners who resorted to a forbearance program had to make up the skipped payments and then wait a year before applying for a new home loan.
The Federal Housing Finance Agency's announcement on Tuesday establishes that homeowners who have gone through forbearance and made three subsequent monthly payments can get a new loan—even if they haven't caught up with the missed payments. (People who were granted forbearance but then didn't need it, and are current on their payments, also will not be penalized.)
The changes will apply only to Fannie Mae and Freddie Mac loans made on or after June 2. Fannie and Freddie back about half of all residential mortgages, or 28 million borrowers.
"We didn't want to penalize" borrowers, FHFA Director Mark Calabria said on Tuesday at a Mortgage Bankers Association event. Those who make good on their loans, "we will treat you like you've never been in forbearance."
About 8.16% of residential mortgages were in forbearance as of May 10, representing about 4.1 million homeowners, according to the MBA.
This means many homeowners hurting financially will be able to reap the benefits of record-low mortgage interest rates. On Tuesday, the average 30-year fixed-rate mortgage was just 3.15%—a full percentage point lower than a year ago, according to Mortgage News Daily.
And if rates dip under 3%, some folks could shave hundreds of dollars off their monthly payments and tens of thousands of dollars off the life of their 30-year loans.
"This is a big deal," says Rocke Andrews, a mortgage broker at Lending Arizona in Tucson. He's also the president of the National Association of Mortgage Brokers, a trade group. "You're not punished for going into forbearance."
"They are going to require you to spend three months reestablishing your credit," he says. But "it's less punitive than 12 months."
But while most lenders follow the guidance set by the FHFA, not all will, especially when more than 36 million people have filed for unemployment in the past two months.
"We're in such uncharted territory that it's unclear what lenders are going to impose upon borrowers," says Charles Gallagher III, a St. Petersburg, FL–based attorney who specializes in foreclosures. "It [could still] lock them into their current residence. It would limit potential job options outside of your region if you couldn't move."
That's why borrowers need to think carefully about what taking forbearance could mean for them.
“Weigh out all your options," says lender Andrews. "The way that the forbearance was rolled out, people thought it was a payment holiday and were not advised of the consequences."