We get it; staying on top of things can be challenging, despite all of your hard work. Unexpected hardships can strike at any time, making it difficult to stay afloat financially. As such, keeping up with your monthly payments, including your mortgage payments, might feel impossible.
No matter what hardships you might find yourself facing, understanding your options is crucial. One such option many homeowners turn to in times of financial difficulty is a mortgage forbearance. Here’s your guide to loan forbearance.
What Is Mortgage Loan Forbearance?
Mortgage loan forbearance is an agreement between you and your lender that allows you to stop or reduce your monthly payments temporarily. Normally, you would have to provide proof of hardship to qualify, but hardships related to COVID-19 often don’t require you to submit any documentation other than stating the pandemic as your reason.
The crucial thing to keep in mind is that you should never stop making your mortgage payments without first working out an agreement with your lender, such as a forbearance.
Reasons for Loan Forbearance
There are a variety of reasons why homeowners might request a mortgage forbearance, such as:
- Job loss
- Natural disasters that result in home damage or loss
- Illness or death of a co-borrower
- Separation or divorce
- Medical issues
- An increase in expenses
Pros and Cons of Forbearance
Weighing the benefits and drawbacks of mortgage forbearance can help you determine if it’s the right solution for you. Here’s a simple guide to loan forbearance:
Pros of a mortgage forbearance include:
- It provides you with the time you need to get your finances in order and get back on your feet following a short-term hardship.
- Forbearance generally won’t affect your credit; in most cases, your lender reports you as current on your payments during the forbearance period.
- You avoid late payments — which do affect your credit — as well as the risk of foreclosure.
There are also a few disadvantages when it comes to mortgage forbearance, such as:
- Interest still accrues on your mortgage, even if you don’t have to pay anything during the forbearance period. You need to repay it, plus your skipped mortgage payments, when the period ends.
- Forbearance only provides a short-term solution.
- If your lender mistakenly puts a derogatory mark on your credit report, it will hurt your score and could affect your ability to get a loan in the future.
How Loan Forbearance Works
Mortgage forbearance temporarily reduces or stops your monthly mortgage payments. The forbearance may last for a few months, or it may last for several months.
If you qualify, you and your lender will discuss the terms of your forbearance, including:
- The length of your forbearance
- Whether your payments will be reduced or stopped altogether
- If you agree to reduced payments, the amount you’ll pay each month
- Your repayment terms
Again, interest accrues during your forbearance. You will need to repay it plus the total amount you didn’t pay during the forbearance period. You often won’t need to pay it off all at once, though. Before the end of your forbearance period, your lender will contact you to discuss your repayment terms.
How to Apply for Loan Forbearance
If you’re having trouble paying your mortgage, the first thing you should do is contact your mortgage lender. Be sure to have all of your financial information ready, including your mortgage statements, monthly debts — including car, student loan, and credit card payments — and your income information.
You’ll also need to provide some details regarding your hardship and explain to your lender why you’re having trouble making your payments. Your lender will be able to help you determine your potential options and determine if you qualify for forbearance.
Things to Know During the Forbearance Period
Amid hardship, mortgage forbearance can be a great relief. In this guide to loan forbearance, there are a few things that you should keep in mind during your forbearance period.
What to Do When You First Enter Forbearance
When you enter your forbearance period, one of the first things to do is stop automatic withdrawals for your mortgage if your lender deducts your mortgage payments automatically from your bank account. You should also confirm with your lender that they will continue to pay your taxes and homeowner’s insurance.
During your forbearance period, you should monitor your monthly mortgage statements and keep an eye on your credit score. Should you find any errors, dispute them immediately.
What to Do When Your Forbearance Ends
Near the end of your forbearance period, your lender will contact you to discuss your repayment options. You have a few available to you, including:
- Repaying the total amount of your missed payments plus interest all at once (reinstatement)
- Entering a repayment plan
- Deferring your payments until the end of your mortgage term
- Requesting a loan modification
Alternatives to Mortgage Forbearance
Forbearance isn’t your only option if you’re facing financial hardships. One alternative is mortgage modification. With this solution, your lender alters your loan temporarily or permanently, depending on your situation. You may be able to refinance your mortgage, which could lower your interest rate as well as your monthly payments.
Another option if you can’t afford your mortgage payments anymore, but don’t want to leave your home, is to seek a sale-leaseback. With this solution, you sell your home to a company and use the money to pay off the balance of your mortgage.
Any funds remaining are yours to keep, and you can do with them what you need. For instance, you can use the money to pay down other debts, which can help you stay on your feet during your hardship.
The best part is that a sale-leaseback allows you to stay in your home. All you have to do is pay monthly rent.
Unexpected hardships are, by definition, impossible to predict. Even the most responsible homeowners can suddenly find themselves facing a difficult situation and struggling to stay on top of their financial obligations.
Mortgage loan forbearance is one option that can help you weather the storm and take some of the pressure off while you get back on your feet. Understanding all of your options will help you make the best possible decision for your home and your future. If this guide for loan forbearance wasn’t enough, talk to a financial advisor to learn more about your options and the best choice for your needs.