Does Covid-19 mortgage forbearance affect my credit?

19 Aug

As the pandemic wreaked havoc on the people’s lives and the economy, mortgage forbearance was often the best option for homeowners struggling to cover their monthly bills. It helped millions of people stay in their homes, despite losing their job and income. 

Unfortunately, a few months later, the pandemic is still raging out of control and for many homeowners, their financial situation has only grown worse. Industry experts are starting to point out cracks in the forbearance system that could turn into major issues for millions of homeowners. 

Let’s have a quick look at a few of the issues that have experts worried:

Repaying skipped payments

While it was pretty easy to get into a forbearance plan, exiting it may be difficult. The CARES act allowed homeowners to call their mortgage servicer and request payment relief because they had been financially impacted by COVID. According to Black Knight research, over 4.1 million forbearance plans were in place by July. 

Despite it being easy to get into a forbearance plan, the big question now is what happens next and how do homeowners repay the missed payments. 

Here are a few options homeowners are being offered:

Loan modification: Some lenders may be willing to work with a homeowner to modify the loan. This can mean reducing the interest rate or tacking the missed payments on to the end of the loan term. While this is not the same as refinancing, it does adjust the terms of the loan for the rest of the loan term. 

Payment plans: A payment play allows the homeowner to repay the missed payments over time. As an example, your lender may allow you to pay $150 extra a month which will be applied to the total of the missed payments. How much you owe, and how much you repay each month will determine how long it will take to clear the debt. In most cases, you will be paying the extra amount for at least a few years. 

Combo plans: This is when a loan modification and payment plan are both put in place. The lender may reduce the interest rate while the homeowner agrees to pay extra money each month to erase their debt. 

Lump sum payment: This is probably the most difficult option for homeowners, basically the borrower agrees to repay the entire forbearance balance at once. They may be using savings, investment money or even retirement savings. While this is an option that a borrower can choose, it cannot be required by a lender due to government rules on forbearance. 

It should be noted that not all borrowers will have access to all of these options, it will depend on your lender. The best advice is to the talk to your loan provider prior to your forbearance coming to an end so you are aware of the various options available to you. 

A Few Questions to Ask Before Your Forbearance Ends

Has My Credit Been Affected?

Legally, your missed payments should not impact your credit score during the forbearance period but there are plenty of opportunities for mistakes to be made by credit reporting agencies and even lenders who may end up reporting missed payments. 

Pull a credit report and check for mistakes or reported missed payments that are related to your mortgage. If you find any errors, report them immediately and work to get them corrected. 

What’s the status of my mortgage?

It is best to have a complete understanding of the status of your mortgage before your forbearance ends. Contact your lender and make sure you are clear on the following:

  • Terms of forbearance: Have a clear understanding of the terms of your plan. The start and end date as well as your options for when it ends. 
  • Current balance: Make sure you understand the status of your mortgage as well as the current balance, payment dates as well as the total amount you owe due to forbearance. 

Are my property taxes and homeowners insurance being paid?

In most cases, property taxes and homeowners insurance is paid by your loan servicer through an escrow account. However, if you are not making a mortgage payment, are those bills still being paid? You should call your mortgage company and make sure those payments have been made.

Also check on your property tax status with the city or county. In many cases this can be done online or via a phone call. Look for missing or late payments. You should also call your insurance company to make sure your premiums have been paid. Insurance companies will drop your coverage for non-payment if your premiums have not been paid. 

The Final Word

Being prepared is your best option as forbearance plans start to come to an end. Make sure you fully understand your options as well as your commitment. Due to the fact that everyone is operating in unprecedented times, there is a good chance that errors will crop up and unfortunately, those errors can impact your credit score and even your insurance coverage.

Stay ahead of potential errors by calling your mortgage provider before your forbearance ends and make sure you are both on the same page regarding your repayment terms. 

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