By now, unless you live under a rock, you heard Governor Gavin Newsom announcement on March 25:
“Millions of California families will be able to take a sigh of relief,” said Governor Newsom. “These new financial protections will provide relief to California families and serve as a model for the rest of the nation. I thank each of the financial institutions that will provide this relief to millions of Californians who have been hurt financially from COVID-19.”
OK, that’s great, right? Call your lender and get a forbearance and not pay our mortgage for the next 90 days. It can’t affect our credit YAY! Well hold on there!
Your lender has agreed to not report your missed or reduced payments to your credit report. That’s fine. Oh, but wait. What will it do?
“If you plan to do a refinance or sell and buy another home in the near future, say bye bye Felicia to your approval”
When you apply for a re-fi or a new loan, lenders don’t just look at your credit history, they also look at your payment history….Wait What? Yup, they will discover the forbearance and there goes your approval…poof! They have ways to discover these forbearance and they also look at your bank statements for missed payments. Oops!
While there are different forbearance options. Most only defer your payment until the end of the agreed to forbearance period…NOT the end of your loan (they are not like a student loan forbearance…sorry).
Let’s look at a example. The homeowner has a monthly mortgage payment of $2,500.00 a month and has received a 90 day forbearance effective April 1st.
“With Interest Rates Fast Approaching Historic Lows A Refinance Can Be A Much More Desirable Alternative To Forbearance” – Rick & Shawn Muro – Gold Star Financial
You can’t afford to pay it all at once. Your lender says “That’s OK”, we can set up a 12 month payment plan. Now your new monthly mortgage payment is $3,333.00 for the next 12 months.
Let’s also talk about the flip of side of this. If millions of Americans stop paying their mortgages, what can happen. Well for one, and it’s a big one, Loan Servicing companies could go bankrupt and there is our new financial crisis which will trickle to the next housing crisis. I will talk more about that in my next blog. So be sure to subscribe to my blog to get email updates on new blogs posted here!
Here’s another trend I just heard about and I am very disgusted about. There are real estate agents trying to take advantage of this current crisis and are promoting “buy a house with me and make no payments for 6-12 months”. Ummm…can we say Ethics violation?
Let’s talk about the potential of being foreclosed and losing your home if you do get a forbearance and cannot pay the total amount or the new monthly payment.
If you think it will be like the Great Recession of 2008, you would be way off base. Today, the majority of homes have big time equity. In 2008 the lenders had no real leverage, they had to work out a new loan payment, short sale, etc with the homeowner.
Today, the lenders have the leverage, they can foreclose on you and sell your home for what you owed them and it’s a good deal for them. Not like 2008 when they foreclosed they took a big loss.
So you say, I will get the forbearance and if I can’t pay it back, I will sell my home, keep my equity and rent or buy something else. That’s great, if you can sell before the lender forecloses. While there is a process for lenders to foreclose in California, (average time to foreclose is around 6 months), That time frame may not be long enough. If millions of people have to sell because they can’t pay back the forbearance or work out a plan and they put their home up for sale, this could shift our market from the current sellers market to a buyers market. Which means homes will be on the market longer.
In conclusion, if you really are not in a position to keep your mortgage payments current, then you should call them and make some arrangements to avoid foreclosure. But make it your last resort if at all possible. And you do go for a forbearance, make sure you get and understand all the details and terms of the forbearance.