As of June 2020, approximately 4.1 million Americans were considering mortgage forbearance as a means of dealing with financial setbacks. However, the urgency created by current economic dislocations doesn’t mean that forbearance is always a good idea.
Forbearance is the act of suspending mortgage payments, providing homeowners with an opportunity to get back on their feet after a financial setback. It can serve as a rescue strategy for both homeowners and the general economy. Forbearance doesn’t ordinarily involve modification of the original mortgage terms; it merely allows homeowners to stop making payments for a specified period of time without risking foreclosure. The lender doesn’t forgive the missed payments, so the homeowner will need to repay them at some agreed-upon point in time, otherwise, the foreclosure process starts. Each lender has its own version of forbearance, which can include everything from skipping payments entirely to reducing required payments during the forbearance period.
Homeowners with federally backed mortgages generally have the right to a forbearance. These homeowners can request a forbearance period of three to six months, with the option of extending if necessary. Homeowners with federal mortgages also have several options for repaying the missed payments after the forbearance period ends. Two options are to make the missed payments in a lump sum or to add the payments to the end of the loan. Homeowners who return to making regular payments after the forbearance period also may have the option of waiting until the house is sold or refinanced before making up missed payments.
Homeowners with a private mortgage will need to get their forbearance options from their mortgage owner or servicer, sometimes both. Ownership and servicing of a mortgage are distinctly different functions and aren’t always performed by the same company. The servicer of the mortgage is the company you make your payments to and receive your statements from, which is who you will work with most closely on forbearance. However, the owner of the loan also plays a role in the forbearance options that will be available to you. Mortgages from private lenders require the borrower to negotiate the terms of their forbearance, which primarily include the length of the forbearance and method of repayment.
Homeowners with federal mortgages don’t pay extra fees, interest, or other penalties when they use forbearance. However, the terms of the forbearance are up to the individual lender in the case of private mortgages. In addition, private mortgage payments often include homeowners insurance and property taxes that the servicer of that mortgage doesn’t cover. In such cases, homeowners who receive forbearance are likely to have to continue making insurance and tax payments.
A forbearance can be a good option, depending on how your lender’s individual rules apply. Just remember payments are only temporarily held off or decreased. You’ll eventually have to pay any deferred monthly payments. Make sure to talk to your mortgage holder to learn more about their forbearance options.