What Is Mortgage Forbearance And How Do You Qualify
Mortgage forbearance is a temporary pause or reduction in monthly mortgage payments for a homeowner experiencing financial hardship. It’s not loan forgiveness instead the deferred payments do need to be repaid at some point. But mortgage forbearance can be a lifeline for homeowners who unexpectedly lose their job or suffer losses from a natural disaster, including the COVID-19 pandemic.
The key to avoiding foreclosure during a financial crisis is to ask for help immediately, says Chuck Kracht, director of loan servicing for the Idaho Housing and Finance Association, which offers free loan counseling to struggling borrowers.
“That’s the best advice I can give to anyone,” says Kracht. “The second anyone has any sort of trouble, they need to call their mortgage servicer or lender, or a loan counselor.”
Time is of the essence, because if you’re able to stay current on your mortgage payments not only will your lender be more open to forbearance, but your credit also won’t take a hit. During forbearance, paused payments aren’t reported to the credit agencies as delinquent if you were on time with your previous monthly payments.
“Mortgage forbearance is when a lender or mortgage servicer either pauses or lowers your payment for a limited period of time,” says Kracht. “It’s designed to provide payment relief during a short-term financial difficulty.”
States With Highest Net Equity Of Typical Gse Borrowers In Forbearance After Missed Payments
Although people who can no longer afford their homes are in a great position to sell, many will still have to jump back into the housing market, and its a tough time for both renters and buyers. If you decide to sell and rent, make sure you know how much rental prices are in your area, as it can be just as much or even more expensive than owning.
What If Forbearance Isn’t Enough
Forbearance is meant to be a short-term pause in mortgage payments while a borrower gets back on their feet, but what if the forbearance period is set to expire and the financial situation hasn’t improved?
Foreclosure is always a possibility, but as Kracht says, lenders have their own reasons for wanting to keep borrowers in their homes and will only turn to foreclosure as a last resort. He explains that the best advice is to call your lender or a free and confidential loan counselor as soon as you realize that there may be difficulty making payments when the forbearance period ends.
At that point, the best option for you and your lender is to make adjustments to your mortgage that make payments more affordable, either by refinancing the mortgage at a lower interest rate or creating some kind of customized payment plan that better fits your budget.
In response to the pandemic, the Federal Housing Finance Agency has extended its foreclosure moratorium for all homes with federally backed loans until at least Dec. 31, 2020.
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How Mortgage Forbearance Works
The first step is to call your mortgage lender or servicer to ask about relief options as soon as you realize you may need assistance with payments. If your lender puts you on a forbearance plan, you can avoid paying the usual fees for late or missing payments, which can add up quickly.
Forbearance doesnt mean that your debt is erased instead, your payments are temporarily reduced or put on pause. You eventually will have to pay back what you owe. Before your forbearance period ends, your lender should contact you about post-forbearance options to repay your missed payments.
These options may include a repayment plan that lets you add extra funds to your regular monthly payment. This can help you bring the payments back up to date over a specified period of time, like 12 months. You can also pay back your forbearance all at once if youre able to do so this is called reinstatement.
New Rule Helps Struggling Borrowers Avoid Foreclosure
Preventing foreclosure is the most important goal when exiting forbearance. Whether you choose to modify your loan, go with a payment option for the months you missed or sell your home, all of these are better options than losing your home in foreclosure.
Foreclosure is emotionally and financially damaging. According to Experian, homeowners can see as much as a 100-point reduction or more to their credit score after foreclosure. This kind of blow can affect your ability to rent, buy, apply for new credit and even get a job.
To help homeowners avoid foreclosure, the Consumer Financial Protection Bureau issued a rule in place that will require lenders to follow three steps before starting a foreclosure, which include:
The CFPBs new rule goes into effect from August 31 through January 1, 2022. As long as the loan servicer adheres to these rules, they can file a foreclosure if necessary.
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What If You Still Cant Afford Your Mortgage Payments After Forbearance
The worstcase scenario: Forbearance ends and you still cant pay your monthly mortgage. What can you do?
Youll probably need to consider disposition options, says Boies.
This may include selling your home if you can no longer afford it. Foreclosure, short sale, and deedinlieu are other ways of disposing of a home you cant afford.
Boies warns, These options may be damaging to your credit and should be reserved until youve exhausted all other solutions.
How To Decide Whether To Sell
For those in about to exit forbearance who want to sell, there are two major forces you should consider: large gains in equity and a very expensive housing market. Its expensive for both owning and renting right now.
This means a seller could make a lot of money on the sale, but they might face a hefty-priced housing market depending on where they chose to live next. Do your research and budget yourself ahead of time, like knowing all the closing costs to selling a home, to determine whether a sale is worth it in the end.
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Mortgage Forbearance Example The Cares Act
In response to the COVID-19 pandemic, which left many people suddenly unemployed or with a severely reduced income, the U.S. Congress passed the CARES Act the Coronavirus Aid, Relief, and Economic Security Act to help struggling homeowners with mortgage loans. The provisions of the legislation offered help to anyone with a mortgage loan that is backed by the federal government, such as an FHA loan, or backed by a Government Sponsored Enterprise , such as Freddie Mac or Fannie Mae.
The first key provision of the law prohibits the mortgage lender or servicer from initiating foreclosure proceedings against the protected mortgage borrowers before at least June 30, 2020 it is expected that Congress will extend the date to a point further in the future. Secondly, the act enables mortgage borrowers to request a mortgage forbearance agreement extending for up to 12 months.
Another key provision of the act is that it prohibits lenders from reporting past-due payments to credit bureaus during the period of forbearance. It is important because normally, in a mortgage forbearance agreement, the lender will still report past due payments to credit bureaus, thereby negatively impacting the borrowers credit score. However, the effect on the borrowers credit score will be considerably less damaging than a foreclosure.
What Does Mortgage Forbearance Mean
A forbearance in the financial sense of the word is a temporary pause in payments. A mortgage forbearance is a pause in your mortgage payment. The idea is to provide assistance to homeowners experiencing a temporary financial hardship to get relief while getting their life and finances back on track.
While this term has come to prominence recently as part of the pandemic relief provided for under the CARES Act, forbearances are also commonly used to gain a foothold after natural disasters, job loss or another financial hardship.
Well get into this in order more detail in a bit, but the reason for your forbearance could have a lot to do with its impact on your credit record, so its never a decision to be taken lightly.
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Can I Buy A New House After Forbearance
Having a mortgage forbearance in your past shouldnt stop you from buying a new home in the future.
Historically, lenders have had stricter requirements about getting a home purchase loan after forbearance. But that was before COVID.
Now, lenders and mortgage agencies understand that the pandemic forced large swaths of homeowners into forbearance many of whom are otherwise perfectly creditworthy.
As a result, theyve loosened up requirements to qualify for a new home purchase with a COVIDrelated forbearance in your past.
Rules are similar to those for refinancing. If you want to buy a new home with a conventional, FHA, or USDA loan, you need to have made at least 3 consecutive payments on your current loan after exiting forbearance.
Again, the Department of Veterans Affairs is most lenient here. It says lenders should not use a CARES Act forbearance as a reason to deny a Veteran a VAguaranteed loan.
Rather, VA borrowers will need to explain the reason for their COVID forbearance and prove that theyre now on solid financial footing.
Of course, borrowers hoping to buy a home after forbearance will also need to meet basic requirements for credit score, down payment, debttoincome ratio, and ongoing income/employment.
But, provided you meet these guidelines, lenders cant deny you a home purchase loan just because you had a COVIDrelated forbearance in the past.
How Does A Mortgage Forbearance Agreement Work
A mortgage forbearance agreement is designed for homeowners who are struggling to keep up with their monthly payments. The borrower can contact the lender and discuss a forbearance agreement in which the monthly payment is reduced or suspended, depending on the borrower’s financial situation.
During that time, the lender agrees not to foreclose on the home, which would involve the lender repossessing the home and selling it to recoup the amount of the loan. A foreclosure can have a significant negative impact on the borrower’s credit score.
After the forbearance period is over, the borrower will continue to make regular monthly payments plus a lump sum or an additional monthly amount to get caught up on their loan repayment schedule. That includes both principal and interest, as well as property taxes, homeowner’s insurance, and mortgage insurance, if applicable.
For example, lets say your monthly payment is $1,000 and you get on a six-month forbearance plan. You may need to pay the $6,000 in payments you missed in a lump sum at the end of the forbearance period or over several installments as determined by your lender. For instance, you might pay $200 more per month over 30 months or $100 per month over 60 months.
If you’ve received forbearance due to COVID-related hardship, you will not be required to repay your missed payments in a lump sum.
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Does Applying For Mortgage Forbearance Hurt Your Credit Score
A mortgage forbearance agreement may slightly ding your credit score, but what hurts it the most is if you dont satisfy the agreement.
For example, if your lender requires you to pay the full amount of the past due payments at the end of the agreement and you dont, it will hurt your credit score even more.
Before you agree to the plan, make sure you understand the repayment options and that you can afford them.
Heres The Important Thing To Remember:
If you receive a forbearance plan, you will have options when it comes to repaying the missed amount. You dont have to pay the forbearance amount at once unless you are able to do so. About a month before your forbearance plan is scheduled to end, your mortgage servicer will contact you to discuss your situation.
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Can I Extend My Forbearance
If youre still struggling at the end of your forbearance period, you can apply for an extension.
The terms will depend on your lender, but they may grant extensions that last up to 12 months. In some cases, depending on when your forbearance period first started, you might be able to get an extension of up to 18 months.
Extensions arent guaranteed. If youre not approved for an extension, youll need to start looking at alternatives that can help you cover your financial responsibilities.
When Does Mortgage Forbearance End
Your forbearance ends at the end of the term the lender allowed. This means 3 to 6 months for most lenders, but some allow forbearance for as long as 12 months if you can prove you financially need it.
Your lender determines when your forbearance period ends. Its important to take note of this date because this is when your payments start again and when you may owe a large sum of money depending on the terms you worked out with the lender.
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Identifying Your Loan Servicer
If you want to ask if mortgage forbearance is an option, determine your mortgage servicer, which may not be the lender that originally provided the loan.
The name of the servicer typically appears on the bill that arrives in the mail or on the website where mortgage payments are made. You could also try the MERS® website .
Those who think they may have Fannie Mae or Freddie Mac-owned loans can check online as well.
Mortgage Forbearance: What Is It And How To Get It
Forbearance allows you to pause or shrink mortgage payments temporarily to get through a financial hardship.
Edited byChris JenningsUpdated October 12, 2021
Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. By refinancing your mortgage, total finance charges may be higher over the life of the loan. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”
Mortgage forbearance can help when you dont have enough money to make your mortgage payment. With your servicers permission, it allows you to make smaller payments or put payments on hold for a short period of time. Interest may still accrue, and youll have to catch up on your missed payments at some point.
Heres what you need to know about mortgage forbearance:
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Payment Deferral Pros And Cons
The new payment deferral option policy is an important and positive change. However, it is not an absolute safe haven for borrowers with forbearance plans.
The payment deferral option helps borrowers who face suddenly-higher monthly payments. However, theres still the problem of meeting bills established before forbearance.
Go back to the borrower with a $1,200 mortgage. Even without a requirement to pay an additional monthly amount, theres still an obligation to pay the basic mortgage bill, that $1,200 a month.
Making those regular payments may not be possible for borrowers who lost their jobs or face sharply-reduced incomes.
The payment deferral option applies to loans that involve government programs. There are millions of mortgages not covered by the plan. Will they get similar relief? We dont know yet.
Lastly, what if the borrower must sell perhaps to move for a job opportunity but the propertys value is less than the loan balance? Must the borrower bring cash to closing? Will the bank agree to a short sale where it accepts less than the full amount of the debt?
While payment deferral is an improvement over traditional forbearance plans for many, its still not a free card and needs to be considered carefully.
Options To Avoid Foreclosure
You have several options when it comes to avoiding foreclosure. Although banks may work with you when you first fall behind, most will only wait a short time for you to find a new job or fix the problem that is preventing you from making payments. When you reach the time limit, the bank will initiate the foreclosure process. Once that happens, its very hard to stop the process.
In most cases, once foreclosure begins, you have a limited amount of time before you will be legally forced to vacate the home. The bank then sells the property to a new owner. Foreclosure obviously severely damages your credit. Add the loss of your home to the mix, and the stress level tends to be excessive.
Obviously, most homeowners want to avoid losing their home, but they also want to avoid the negative hit their credit will take. The options to avoid foreclosure if youre behind on mortgage payments include mortgage forbearance and a loan modification agreement. A loan modification results in a permanent modification of the loan, while mortgage forbearance is only meant to be a temporary fix.
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How Does This Agreement Work
Under a mortgage forbearance agreement, payments are temporarily paused for the term of the agreement. During this time, the lender wont pursue foreclosure. Additionally, late payment fees and penalties are waived. If your hardship is still ongoing, your lender has the option to extend your forbearance.
Mortgage forbearance is not meant to be a long-term solution to financial issues, but it is meant to give you time to get back on your feet and put yourself in a more stable situation.
Once your forbearance is over, youll have to resume making payments. Depending on the circumstances of your forbearance and what you qualify for, youll have different options to get current on your loan. These will also be dependent on the investor in your loan . Your options may include the following:
Your mortgage servicer will reach out to you near the end of the term of your forbearance to discuss potential options to get back on track moving forward.