The mortgage market is aware of how much the coronavirus pandemic has affected households all over the country. Families have experienced drastic changes in their lifestyle, living situation, and even economic status, so it is easy to see how homeowners might view mortgage refinance or even forbearance as a viable option when managing their resources.
Skipping your mortgage payment for 180 to 360 days is understandable, and even necessary if your financial needs are especially urgent. Forbearance, though, makes less sense if you are not in that situation. Here are some things to consider if you are thinking about skipping your payments.
Forbearances Mean Uncertainty For Companies
According to the CARES Act, there is no need to verify whether applicants for forbearance of FHA or VA loans truly require the extension that they are requesting. If you claim to have a financial need, your provider cannot ask you to submit documents to prove it.
As a result, more people are claiming forbearance, which leads to higher non-payment in the industry. The risk to this is that the coronavirus pandemic is here to stay indefinitely. Uncertainty is costly, and financial institutions would rather cover those costs proactively.
For example, it is costlier to enter forbearance prematurely—housing agencies are now charging seven percent of the loan balance to lenders if debtors apply for forbearance soon after closing. These penalties add up rapidly and can cause a lender to go under.
To remedy this, some investors who purchase mortgages charge it on the consumer. They offer higher rates, more fees, or refuse to offer loan programs that they deem overly risky. The higher the number of risk factors, the higher the payments.
They Also Have More of An Impact Than The Law Implies
In addition, the industry defines ‘risk factor’ conservatively. For example, agencies do not guarantee loans if they see early forbearance, even if the lenders handling these pay the seven percent penalty. Moreover, you might not be able to get a refinance or apply for a new mortgage if your credit report has an instance of forbearance.
Mitch Stam, President of Desert Springs Mortgage shared, “This is inconsistent with the law—it states that there should be no adverse effect on a person’s credit report due to a forbearance. Though companies would not count payments after forbearance as late, the application itself is still a red flag for the agencies especially as the CARES Act is still active.”
While it is true that forbearance does not impact a person’s FICO, you can experience other financial constraints because of it. For example, some creditors lower their revolving credit limits for people whose credit reports indicate that they have a forbearance. Lower available credit limits increase the debt-to-credit ratio, which then affects the FICO score.
Desert Springs Mortgage Company in Phoenix
Although the forbearance itself will not pull down your FICO score, it has other adverse effects. Lenders who see your application on your report might cause changes in your mortgage situation that would lower your score, hurting your chances of getting a mortgage refinance or a new loan. To be sure, you should consult with an expert who can lay down all your realistic options clearly.
Desert Springs Mortgage is a full-service mortgage company in Phoenix. Keeping your home or refinancing it is easier when you know your options, and Desert Springs Mortgage team of expert brokers will help you find the best ones for your family. Call them today at (623) 432-1309 for more information!