Never in my almost 20 years in the mortgage industry have I seen anything spread so quickly or seen so much incorrect and incomplete information being disseminated by so many. Legions of experts and pundits are lending their two cents to the body of work on blogs, in Facebook groups and even on broadly consumed and respected news outlets. Many are wrong about the details and most are not even addressing the impact that forbearance can have, especially on credit.
Forbearance is a solution for borrowers who CANNOT pay their mortgage due to hardship. Because of this, forbearance is seen by creditors as, at the very least, a temporary reflection of an inability to repay a mortgage loan. Creditors and credit rating algorithms generally look negatively at any documented history of an inability to pay a debt, especially a mortgage. So, to understand the impact of forbearance, you need to instead look at the situation that created the need as opposed to the forbearance itself. Confused, yet? Well bear with me.
When someone needs forbearance, they usually have fallen on hard times. They are likely in dire straights and have already fallen behind on some of their financial obligations. Often, they already have late payments or worse that have driven them to seek solutions, such as forbearance or a modification. Remember, they need to show the need before a servicer will consider offering the client any change to their existing mortgage. That is not to say that there are not circumstances where homeowners can show and document that they are headed into a tough time from which they will emerge willing and able to pay their mortgage, but that is usually the exception. After the forbearance period, many homeowners seek modification which often does have a direct credit impact as it demonstrates a longer-term inability to pay their home loan. So, while the forbearance itself did not cause the credit to drop the entry point into and the exit point out of forbearance did with a result of a lower credit score.
So, what does that mean to the COVID-19 forbearance tsunami? Unfortunately, there is no good answer. The sheer volume of requests and the lack of requirements to enter forbearance have overwhelmed banks as well as government sponsored entities, like Fannie Mae and Freddie Mac. Nobody knows what the options will be post-forbearance, but most forbearance agreements are referring to a balloon payment, a payment plan or a modification such as tacking the deferred payments onto the end of the loan. Like any forbearance agreement before the coronavirus crash, homeowners who pay in full at the end of the forbearance period or who pay over a set repay period should have minimal if any impact. If you are expecting to use a modification and emerge unscathed, you could be sorely mistaken and caught of guard when your credit is impacted. Remember, a modification is generally seen as the need to alter the terms of a loan to account for an INABILITY to pay.
Now, to be sure, I am not advocating for or recommending against forbearance, but rather educating as to the potential impact so that you can make an informed decision. I read and hear again and again that homeowners want to get in on the great deal that forbearance offers. It is not a special deal and you need to remember this before making any decisions. Forbearance is a solution to a financial hardship and there can be a cost and lasting impact. If you are truly struggling to pay your bills, your credit score is likely the least of your concerns and forbearance offers a life raft. If you anticipate the potential for the need in the near future, you can take forbearance, work hard to maintain your reserves and apply them to a repayment plan at the end of the forbearance period without much impact. If you are in good shape now and you want to use forbearance to take advantage of the situation and exploit the crisis to your benefit, however, you could have a very unpleasant outcome.